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Nvidia’s NVDA mega-rally has spilled over into a niche funds area: single-stock ETFs.
Investors looking to go all in on the biggest name in semiconductors have swelled Nvidia single-stock ETFs to the point where they make up more than half of all such assets. The stock, hitting new highs after falling in July, has returned 179.0% in 2024, more than 7 times the Morningstar US Market Index’s 23.4%.
“There’s only one Nvidia. That’s the highest-conviction trade in the world right now,” says Will Rhind, founder and chief executive officer at GraniteShares, a firm that offers dozens of single-stock ETFs.
What Are Single-Stock ETFs?
Single-stock ETFs use derivatives to match a particular multiple of the return of a stock. For example, the $5.7 billion GranitesShares 2x Long NVDA Daily ETF NVDL has daily returns equal to twice that of Nvidia’s stock. If the stock falls by 2% in a day, the ETF falls by 4%; if Nvidia rises by 5%, it rises by 10%. Inverse ETFs do a similar thing, but the multiplier can be negative, as in the case of the $90 million GraniteShares 2x Short NVDA Daily ETF NVD. Here, if the stock falls by 2%, the ETF rises by 4%.
Importantly, the ETFs only match a multiple of the stock’s performance over a specified period—almost always one day. The funds do not track an asset’s performance over a longer period. “Anybody who trades our vehicle needs to realize that we reset the leverage every day. We’ll track [a multiple of the asset] for anything for a single day. After that day, there’s going to be compounding, and that depends on the path of that underlying index or stock during the time you own it,” explains Ed Egilinsky, managing director at Direxion. “So the trend’s your friend, as I like to say. If something’s stair-stepping in your direction, it may enhance your returns, but if it’s choppy or goes against you, your losses could be magnified.”
In fact, because of the quirks of the leverage reset, long-term holders of a single-stock ETF can lose money even if the underlying stock rises.
For Most Investors, Single-Stock ETFs Are Best Left Alone
Who Are Single-Stock ETFs For?
Two main groups utilize single-stock ETFs. First are very active individual traders, who use them to make short-term bets on individual stocks. For smaller traders, the cost of margin loans and stock borrowing costs makes leveraged trading and shorting stocks expensive compared with the generally lower cost of trading an ETF.
A second main group comprises algorithmic high-speed trading firms, which make arbitrage trades with the funds. These firms look to exploit tiny price differences between investments with generally similar characteristics. For example, an index-tracking ETF may trade at a slightly lower price than the total price of its stocks. A firm can buy the ETF, redeem it for the shares of the underlying stocks, and sell those stocks for a profit. Rhind says single-stock ETFs are a new category of arbitrage.
Nvidia ETFs Knocks Tesla Off the Podium
Single-stock ETFs used to be dominated by Tesla TSLA. At the end of the third quarter of 2023, the Direxion Daily TSLA Bull 2x Shares ETF TSLL was by far the largest single-stock ETF on US markets, with $1 billion in assets. It held nearly five times as much as the next largest, the GraniteShares 2x Long NVDA Daily ETF, which had $221 million in assets.
Since then, the two have swapped places and then some. While the Tesla ETF has doubled its assets to $2 billion, the Nvidia ETF has multiplied its assets times 26, swelling to $5.7 billion. While price gains are part of the reason for the jump, flows are the primary driver. As of the end of September, the largest Nvidia single-stock fund pulled in over $3.3 billion in investor dollars, exceeding not only every other single-stock ETF but also every other leveraged and inverse stock ETF, including ones that track stock indexes.
All eight Nvidia single-stock ETFs hold $7.3 billion in assets, more than half the $12.8 billion in single-stock ETFs on US markets. Additionally, the $4.4 billion that flowed into those funds in 2024 through the end of September was more than half the $7.4 billion in total net inflows to single-stock ETFs.
The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.
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