(Bloomberg) — For day traders riding the AI-fueled stock mania, it’s been a money-minting bet like no other — offering double-digit returns week in and week out.
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Now though — after pouring a record amount of cash into a leveraged-up ETF — a cohort of retail investors faces big losses following the roughly $400 billion wipeout in Nvidia Corp.
The GraniteShares 2x Long NVDA Daily ETF (ticker NVDL), which delivers double the daily return of the Jensen Huang-run company, saw a record $743 million inflow last week as investors sought to amplify gains in what has been dubbed the world’s “most important stock.” The timing has proven inopportune, as the fund has tumbled around 25% since Tuesday’s close. It’s still up about 329% in 2024.
“It is a very high-risk, high-return move piling into leveraged NVDA positions – given the stock has been driven by momentum and sentiment, so it’s hard to tell when the stock would finally retrace,” said Dave Lutz, head of ETFs at JonesTrading. “Retail traders need to really understand the structure of these products to fully understand the risk they entail.”
The ill-timed rush in last week underscores the feast-or-famine performance risk when it comes to investing in this high-octane breed of ETF, which uses derivatives to boost returns or reverse performance. Inverse and leveraged ETFs are popular among day traders as they’re designed to be held for short periods. But their structure means they can deliver swift losses as well as big gains.
Launched in December 2022, the $3.7 billion ETF has lured about $1.8 billion in 2024, after attracting $189 million last year.
Nvidia, the posterchild of the AI craze, is up some 140% this year. The chipmaker has ascended to become the second-largest weighting in the $70 billion Technology Select Sector SPDR Fund (XLK), comprising over 20% of the tech ETF.
Meanwhile, Nvidia bears have gotten crushed this year by the $93 million GraniteShares 2x Short NVDA Daily ETF (NVD), which tracks the daily inverse return of the underlying stock, and is down nearly 90% this year.
For now, Nvidia’s spectacular surge is taking a breather. The stock on Monday entered correction territory as it extended a sharp selloff. After briefly claiming the title of the world’s largest stock last week, it has tumbled 13% across three sessions, past the 10% threshold that represents a correction.
“NVDA and its AI peers were ripe for a correction after their huge run-up,” said Jane Edmondson, head of thematic strategy at TMX VettaFi. “Investors are likely taking some profits at quarter end and realigning their portfolio allocations. But the underlying fundamentals are still in place.”
–With assistance from Lu Wang.
(Updates shares.)
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