To The Moon

Leveraged Tesla exchange traded funds have been soaring so far this year.

On Friday, $Direxion Daily TSLA Bull 1.5X Shares(TSLL)$ became the first single-share ETF to surpass $1 billion assets in U.S. stock market.

This is an incredible achievement for an exchange-traded fund that is less than a year old and  with just $168 million in assets under management at the beginning of 2023. 

TSLL's success can be attributed to the drastic rise in $Tesla Motors(TSLA)$ 's stock price since the beginning of the year, compounded by the large amount of money flowing into the ETF. Since its inception on August 9, 2022, investors have injected $594 million into TSLL; however, the ETF's price has fallen 17.6% (while TSLA has gained 1.5%). Since the low point on January 3, TSLL has risen 291% (versus 166% for TSLA itself).

After losing nearly three-quarters of its value between November 2021 and December 2022, Tesla stock has regained its positively upward momentum between 2020 and 2021. Diverse factors including strong car sales, competitors adopting its charging technology of electric vehicle, and expectations for the company's Cybertruck and Robotaxi contribute to the bullish outlook of Tesla. 

Performance of Single-Stock ETF

The rapid rise of TSLL is the positive sign for the single-stock ETF. ETFs targeting the right stocks at the right time can meet a lot of demand from the aggressive short-term traders, which is the purpose of ETF designing.  

The second most popular single-stock $GRANITESHARES 1.5X LONG NVDA DAILY ETF(NVDL)$ has $151 million in assets under management.

Similarly,  $NVIDIA Corp(NVDA)$ is a popular stock. Thanks to its dominant position in the artificial intelligence industry, NVIDIA shares have more than tripled this year, driving NVDL up 387%. 

Even single-stock ETFs tied to heavyweights like $Amazon.com(AMZN)$ and $Apple(AAPL)$ , such as $DIREXION DAILY AMZN BULL 1.5X SHARES(AMZU)$ and $AAPL Bull 1.5X ETF-Direxion(AAPU)$ , each have just $37 million in assets under management.  

In other words, the success of TSLL is difficult for other leveraged single-stock ETFs to replicate.  

What is a "Leveraged Single-Stock ETF"?

U. S. leveraged ETF products have been in operation for 16 years, offering investors the opportunity to invest in an index underlying with leverage. Leveraged single-stock ETFs apply the mechanism to a single stock with innovation, accessing investors to purchase such products and invest in the underlying stock with a leveraged long or short multiple.

In the case of the Direxion Daily TSLA Bull 1.5X Shares (TSLL), for example, this ETF is a bullish product with 1.5x leverage, where the fund management company designs the product and handles the complex trades through financial derivative contracts. Leveraged at 1.5x with Direxion Daily TSLA Bull 1.5X Shares, the product would rise 4.5% in a single day when the underlying stock (Tesla) rises 3% in a single day.

The Return Features of Leveraged Single-Stock ETF

Like other leveraged ETFs, leveraged single-stock ETFs are characterized by multi-day cumulative returns that deviate from the returns of the leverage multiple due to "rebalancing" operations:

Leveraged ETFs and inverse ETFs maintain their leverage or shorting ratios at their initial ratios at the beginning of the next trading day by rebalancing their long and short positions before close. The daily rebalancing of leverage causes leveraged and inverse ETF returns to gradually deviate from the returns of leveraged investments made through margin accounts, known as the "rebalancing effect". Generally speaking, as long as there is no clear upward or downward trend in the underlying index, the higher the volatility, the higher the leverage; and the longer the holding time, the greater the deviation of an investor's return from holding a leveraged and inverse ETF versus using a margin account.

As a result, as for the holding time, the multi-day leveraged returns of these ETFs are inaccurate, and only the single-day leveraged returns are relatively accurate and more suitable for adoption as an intraday trading tool. As Caroline Crenshaw (A SEC Commissioner) emphasized, over an extended period of time, an investor's return may be significantly lower than the expected level based on the performance of the underlying stock, which is more obvious in the volatile market 

In the case of $Tesla Motors Bear ETF-AXS(TSLQ)$ , for example, the product is a -1x ETF tracking Tesla. The comparison of the daily returns and interval relative price movements from the ETF and the underlying stock TSLA shows that: the daily returns of TSLQ and the underlying stock Tesla (TSLA) are relatively close to each other in negative terms, with an average difference of 0.01% and a maximum difference of 0.8%. From inception on July 14, 2022 to August 20, 2022, TSLQ's cumulative return had a final difference of 2.21% from TSLA's negative cumulative return, a deviation that had built up over a month, demonstrating the effects of the "rebalancing effect".

What are the risks of trading leveraged single-stock ETFs? 

Compared with the commom stock ETFs, leveraged single-stock ETFs not only have leverage attributes and risks associated with concentrated investments, but also have certain risks associated with their more complex operational structure:

Leverage attributes: Multiple leverage magnifies gains, losses and volatility. That’s means the volatility and risk of a leveraged single-stock ETF exceeds the underlying stocks. In general, the volatility of a leveraged ETF is related to the leverage multiple. For instance, the volatility of a 2x leveraged ETF tracking the same index is about 2x the volatility of a 1x leveraged ETF (a traditional ETF), with the possibility of exceeding the leverage multiple in the short term. 

Concentration: Unlike ETFs tracking the price of an index and reflecting the investment returns of a basket of stocks, leveraged single-stock ETFs track the price of a single stock and have no risk diversification mechanism, leading to more concentrated risk. 

Operation: Leveraged single-stock ETFs all utilize derivative instruments for investment. Some factors including pricing, supply and trading of derivative instruments in a single stock may affect the operation of the ETFs, which may increase the tracking error of the ETFs or make it difficult for the ETFs to create new shares.

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