This single-stock ETF with Nvidia exposure is up over 400% this year. Why investors should stay away.

MW This single-stock ETF with Nvidia exposure is up over 400% this year. Why investors should stay away.

By Isabel Wang

Single-stock ETFs are flawed for almost all retail investors, Morningstar analyst warns

Hello! This is MarketWatch reporter Isabel Wang bringing you this week's ETF Wrap. In this edition, we look at single-stock ETFs, which are having a moment in 2024 as ?Nvidia's stock has seen an extraordinary rally.

Please send tips or feedback to isabel.wang@marketwatch.com or to christine.idzelis@marketwatch.com. You can also follow me on X at @Isabelxwang and Christine at @CIdzelis.

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Animal spirits are again running wild on Wall Street.

A seemingly relentless rally in the U.S. stock market in 2024 has everyday investors eager to amplify their bets on some of the most popular names, including Nvidia Corp. $(NVDA)$ and Tesla Inc. $(TSLA)$, even if it sounds a lot like gambling.

Thrill-seeking investors with a high risk-reward appetite are piling into single-stock leveraged exchange-traded funds that use derivatives to magnify returns of the underlying shares. Analysts said this type of ETF might be one for retail investors to avoid - and it shouldn't be the backbone of their 401(k) plans or long-term investment portfolios.

The GraniteShares 2x Long Nvidia Daily ETF NVDL, with $5.4 billion under management, has advanced over 400% so far this year, compared with Nvidia's 160% gain over the same period. The fund has seen a total net inflow of nearly $3 billion in 2024, versus only $184 million that it garnered during all of 2023, according to FactSet data.

Single-stock ETFs are not completely new to the ETF space. The U.S. Securities and Exchange Commission approved the listing of the first such fund in July 2022, but they didn't proliferate in both numbers and size until late 2023.

The growth in single-stock ETFs has "coincided with the rise of the artificial-intelligence frenzy in late 2023 and 2024, and they represent a novel way for investors to tap into some of the most well-known stocks that they like to track, and the funds do so in a highly leveraged, more volatile way," said Ryan Jackson, manager research analyst of passive strategies at Morningstar Research Services.

"This is almost meeting investor demand for that gambling mentality of going all in, and getting that distilled shot of adrenaline when it comes to following the stock market," he told MarketWatch in a phone interview on Thursday.

See: Bullish on Nvidia? This single-stock ETF could offer 1.5 times leverage on the popular chip stock - but be careful what you wish for.

As of May, there were around 60 U.S.-listed single-stock ETFs, with around $8.7 billion in total assets under management, according to data compiled by JPMorgan Chase & Co.

Last year, funds tracking shares of Tesla held the majority of single-stock ETF assets, but Nvidia-related funds have become more popular in 2024 given investors' enthusiasm on the AI theme and the chip maker's strong outperformance in the stock market.

Nearly half of single-stock ETF assets were in Nvidia-related funds as of May, compared with around 20% in Tesla-linked ETFs, a team of JPMorgan strategists led by Bram Kaplan, said in a June note.

Besides Tesla and Nvidia, there are also funds tracking other Big Tech companies including Apple Inc. $(AAPL)$, Amazon.com Inc. $(AMZN)$ and Microsoft Corp. $(MSFT)$. Last month, Rex Shares and Tuttle Capital Management filed to launch 44 single-stock ETFs, offering 200% long and 200% short exposure to meme stocks including AMC Entertainment Holdings $(AMC)$, GameStop Corp. $(GME)$ and Robinhood Markets (HOOD).

To be sure, leveraged single-stock ETFs supercharge the companies they follow, offering higher highs and lower lows. That is no problem for traders who glide in and out of them on a daily basis, but it presents problems for those who hold them for more than one day, said Jackson.

For example, consider a $10 stock that loses 10% on the first day and gains 11.1% the next, it will finish at $10 for a net return of 0%. But if you double the action for the same $10 stock, it will lose 20% on day one, gain 22.2% on the following day, but finish at $9.78, resulting in a 2.2% loss.

That's why in the long term, the underlying stocks must "rise consistently" for returns to meet or exceed the ETF's stated leverage, since the funds apply leverage and reset on a daily basis, Jackson said, adding that "zigzagging up the mountain makes it hard for these products to reach the top."

"When you lose more, it's harder to make it back up in the subsequent day," he said. "These funds are designed to be very short-term holdings, and they should be treated as such by investors - they're not designed to be held for a long time, and people [could be] potentially costing themselves a ton in that volatility trap."

See: Tech-stock selloff may drive Magnificent Seven's worst day ever by this metric

Scott Acheychek, chief operating officer of REX Financial, the parent company of REX Shares, said the average hold time of a single-stock ETF is around a day and a half.

"There's definitely people that hold it longer, but if you don't have your eye on it, then you're doing something wrong," he told MarketWatch via phone on Thursday.

Meanwhile, ETF issuers will keep piling into this new marketplace and "expand it over" other popular stocks, said Matthew Tuttle, chief executive of Tuttle Capital Management who partnered with Rex Shares on the T-Rex single-stock funds.

"We are trying to figure out what are the names that are popular with retail [investors] now, and what are the names that are likely popular three months from now?" he said via phone on Thursday. "We're gonna have a neat little ecosystem [of single-stock ETFs] at some point."

As usual, here's your look at the top- and bottom-performing ETFs over the past week through Wednesday.

The good ...

   Top performers                                                                                                                                                                               %Performance 
   Amplify Junior Silver Miners ETF                                                                                                                                                             7.0 
   Global X Silver Miners ETF                                                                                                                                                                   6.4 
   VanEck Junior Gold Miners ETF                                                                                                                                                                5.2 
   SPDR S&P Biotech ETF                                                                                                                                                                         5.1 
   VanEck Gold Miners ETF                                                                                                                                                                       5.0 
   Source: Source: FactSet data through Wednesday, July 10. Start date July  5. Excludes ETNs and leveraged products. Includes NYSE-, Nasdaq- and Cboe-traded ETFs of $500 million or greater. 

... and the bad

   Bottom performers                          %Performance 
   YieldMax COIN Option Income Strategy ETF   -8.3 
   AdvisorShares Pure US Cannabis ETF         -5.5 
   Fidelity Wise Origin Bitcoin Fund          -5.1 
   iShares Bitcoin Trust Registered           -5.1 
   United States Natural Gas Fund L.P.        -5.1 
   Source: FactSet data 

New ETFs

REX Shares and Tuttle Capital Management on Wednesday launched the T-REX 2X Long Bitcoin Daily Target ETF BTCL and the T-REX 2X Inverse Bitcoin Daily Target ETF BTCZ, providing 200% and negative 200% exposure to bitcoin's daily performance. These funds offer "sophisticated investors" 2X leveraged and inverse exposure to the spot price of bitcoin BTCUSD, the firm said in a press release. Harbor Capital Advisors on Wednesday launched the Harbor AlphaEdge Small Cap Earners ETF EBIT, which is designed for investors looking for small-cap products that seek a "distinctive approach in the pursuit of alpha potential," the company said. T. Rowe Price on Wednesday announced the addition of its first federally tax-free fixed income ETF, the T. Rowe Price Intermediate Municipal Income ETF TAXE. It is designed to focus on investment-grade intermediate-term municipal bonds with a weighted average effective maturity of four to 12 years. SS&C ALPS Advisors partnered with CoreCommodity Management to launch the ALPS | CoreCommodity Natural Resources ETF CCNR. The fund is designed to gain exposure to natural resources by investing in a portfolio of upstream commodity producing companies, the firm said in a press release on Thursday.

Weekly ETF Reads

Bond ETFs rally as investors weigh fresh signs of cooling inflation (MarketWatch) Ether could jump 90% following ETF approvals, even if the funds lack popularity of bitcoin (MarketWatch) Passive investing's rise hasn't ruined the stock market, says Jeremy Grantham's GMO (MarketWatch) 'Crash proof' your portfolio with these 10 stocks and 3 ETFs (MarketWatch) Tesla is now biggest-ever weighting in ARKK after 80% stock gain (Bloomberg) Gender equality fund performance disappoints (Financial Times)A prolific first half for ETF flows (MorningStar Research Services)

-Isabel Wang

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July 11, 2024 18:10 ET (22:10 GMT)

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