To The Moon

Leveraged single stock ETFs get much attention this year. They are among the best-performing ETFs this year. Several of them have seen strong investor demand.

When leveraged single-stock ETFs first launched last July, I was skeptical that they would have much traction. But this year, they have been among the best-performing ETFs this year.

What is a "leveraged single stock ETF"?

Leveraged single stock ETFs allow investors to purchase these products and invest in long or short leveraged multiples of the underlying stock.

$Direxion Daily TSLA Bull 1.5X Shares(TSLL)$, for example, is a 1.5x leveraged product where the fund manager designs the product and handles complex trades through financial derivative contracts. A 1.5x leveraged Direxion Daily TSLA Bull 1.5X Shares would rise 4.5% in a single day when the underlying stock, Tesla, rises 3% in a single day

There are five issuers in single-stock ETF market: AXS Investments, GraniteShares, Innovator, YieldMax and Direxion.

While AXS was the first mover, Direxion (a heavyweight in index-based leveraged and inverse ETFs) became the largest leveraged single-stock ETF issuer.

$Direxion Daily TSLA Bull 1.5X Shares(TSLL)$ up over 47% YTD

$Direxion Daily TSLA Bull 1.5X Shares(TSLL)$ is the largest fund in the segment, with $455 million in assets under management.

After plunging in late 2022, $Tesla Motors(TSLA)$ recovered some of its lost ground in 2023, rewarding those who bought shares near the lows.

Anyone who wants to add a little glamour to their Tesla bets can do so with $Direxion Daily TSLA Bull 1.5X Shares(TSLL)$ . So far this year, the fund is up 47%, while the $Tesla (TSLA)$ underlying stock is up 34%.

Tesla Is an Intriguing Single-Stock ETF for the Short or Long Term

The $YIELDMAX TSLA OPTION INCOME STRATEGY ETF(TSLY)$ provides investors with income from the sale of covered calls on Tesla stock, has also performed well. The fund has $37 million in assets under management and is up 16% year to date.

But it's not just the bullish Tesla folks who buy leveraged single-stock ETFs. Some are using funds like $Tesla Motors Bear ETF-AXS(TSLQ)$ and $Direxion Daily TSLA Bear 1X Shares(TSLS)$ to short the stock, with $115 million and $40 million in assets under management, respectively.

While these funds have underperformed this year, each down 33%, the volatility of Tesla stock makes it an exciting target for traders expressing both long and short views.

Source: ETF.com, in descending order of asset size under management

Other Leveraged Single Stock ETF Performance

In addition to the Tesla ETF, demand is strong for a number of other leveraged single-stock ETFs. $NVIDIA Bear 1.25X ETF-AXS(NVDS)$ has reached $100 million in AUM, even though the fund's price is down 58% in 2023.

$Direxion Daily AAPL Bear 1X Shares(AAPD)$ , $DIREXION DAILY AMZN BULL 1.5X SHARES(AMZU)$ and $AAPL Bull 1.5X ETF-Direxion(AAPU)$ each have about $20 million in assets.

Meanwhile, $GRANITESHARES 1.5X LONG NVDA DAILY ETF(NVDL)$ , $GRANITESHARES 1.5X LONG META DAILY ETF(FBL)$ and $GraniteShares 1.5x Long COIN Daily ETF(CONL)$ are the best performing ETFs this year, with year-to-date gains of more than 100%.

However, these funds have relatively small assets, with only $15 million in NVDL, $5 million in CONL and $2 million in FBL.

Leveraged Single Stock ETF Return Characteristics

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

Leveraged ETFs and inverse ETFs maintain their leverage or shorting ratios at the beginning of the next trading day by rebalancing their long and short positions at the end of the trading day. The daily rebalancing of leverage causes the return on leveraged and inverse ETFs to gradually deviate from the return on leveraged investments through margin accounts, i.e. the "rebalancing effect".

Generally speaking, as long as the underlying index does not have a clear upward or downward trend, the higher the volatility, the higher the leverage and the longer the holding time, the greater the deviation of the investor's return from the leveraged and inverse ETFs compared to the investment return using a margin account.

Therefore, from a holding time perspective, the multi-day leverage returns of these ETFs are not accurate, and only the single-day leverage returns are relatively accurate and more appropriate as an intraday trading instrument.

As highlighted by SEC Commissioner Caroline Crenshaw,

over longer periods of time, investors' returns may be significantly lower than their expected returns based on the performance of the underlying stock, which is more pronounced in volatile markets.

Using the $Tesla Motors Bear ETF-AXS(TSLQ)$ as an example, the product is a -1x ETF tracking Tesla.

A comparison of the daily returns and range relative price movements of this ETF product and the underlying stock TSLA reveals that the negative daily returns of TSLQ and the underlying stock Tesla (TSLA) are relatively close, with an average difference of 0.01%, with a maximum difference of 0.8%. From its inception on July 14, 2022 to August 20, the cumulative return of TSLQ has a final difference of 2.21% from the negative cumulative return of TSLA, which has accumulated some deviation in about one month, showing the impact of the "rebalancing effect".

What are the risks associated with leveraged single stock ETFs?

1.Leverage: Multiple leverage amplifies gains, losses and volatility, which will cause leveraged single stock ETFs to exceed the volatility and risk of the underlying stocks.

In general, the volatility profile of leveraged ETFs is related to the leverage multiple, i.e. the volatility of a 2x leveraged ETF tracking the same index is about 2x the volatility of a 1x leveraged ETF (traditional ETF), but it is likely to exceed the leverage multiple in the short term.

2.Concentrated investment risk: Unlike ETFs that track index prices and reflect the investment returns of a basket of stocks, leveraged single stock ETFs track the price of a single individual stock and do not have a mechanism to diversify risk, making the risk more concentrated.

3.Operation risk: Leveraged single stock ETFs use derivative instruments for investment. The pricing, supply and trading of individual stock derivative instruments may affect the operation of the ETF, increasing the tracking error of the ETF or making it difficult for the ETF to create new shares.