Investors have been jumping into single-stock funds that track Nvidia ahead of the chipmaker's earnings report Wednesday, making this a key opportunity for a fast-growing corner of the ETF world to prove its worth. The GraniteShares 2x Long Daily Nvidia ETF (NVDL) has attracted more than $500 million of inflows over the last month, and is now over $5 billion in total assets, according to FactSet. The T-Rex 2X Long Nvidia Daily ETF (NVDX) and Direxion Daily NVDA Bull 2X Shares (NVDU) have also attracted inflows this month and now have more than $1 billion in assets combined. The three aim to give the holder double the return of Nvidia on any given day. The combined trading volume for the funds has also climbed in the third quarter, even with slow summer activity elsewhere on Wall Street. NVDL, for example, has seen an average of more than 24 million shares traded daily in the third quarter, up from just under 18 million in the second quarter, according to FactSet. The increase holds even if you take out the high activity on Aug. 5, when there was a broad sell-off in the equity market and NVDL volume topped 50 million shares. "Nvidia is the most important stock in the world right now, so therefore it stands to reason that ... there's going to be big demand. That's just the zeitgeist of 2024. But yes, it does surprise me in terms of the strength of inflows, just from a business perspective," said Will Rhind, CEO at GraniteShares. Note: NVDL and NVDU had lower leverage at the start of the year The funds are only designed to hit their target multiple return on a one-day basis, and the issuers warn that returns are likely to drift away from that target the longer an investor stays in the fund. Still, long-term holders have been rewarded in 2024 so far. Entering Wednesday, Nvidia was up 159% for the year, and the three leveraged long ETFs had all delivered higher returns. How they work Single-stock ETFs were approved in 2022 , and several tech companies quickly emerged as the most popular names for this type of strategy. The funds use derivatives such as swaps that are reset daily at the market close to gain leveraged upside exposure or inverse exposure to the price of the underlying stock. But while the single-stock funds are still fairly new, leveraged ETFs on broad indexes or specific sectors have a longer — and mixed — track record. "There are a lot of good things that ETFs provide for investors, but there's also this segment of the ETF market that's almost like a casino that draws a lot of attention as well. And so typically that's been through leveraged and inverse ETFs," said Bryan Armour, Morningstar's director of passive strategies research for North America. Inverse Nvidia funds also exist, though they have been less popular than their leveraged long counterparts so far. However, Scott Acheychek, COO at Rex Financial, said earnings have been a "step up" event for both the short and long funds at his firm and that there seems to be growing interest in the short funds as a way to manage exposure to certain stocks. "I've been around leveraged inverse investing for a long time, but in the last let's say six months, I've been getting more and more calls from financial advisor types. And they're interest primarily in the short products. They feel like they're up to their eyeballs with their clients portfolios in Nvidia," Acheychek said. The advent of the single stock funds has come at the same time as the rising demand for short-term options . Rhind said that the growing demand for the funds could be in part due to the high cost for the types of Nvidia options available to individual traders. What to know Of course, Nvidia's stock won't rally forever, and the leveraged long funds also amplify the losses when the stock declines. Those amplified losses and the so-called "volatility decay" caused by rolling short-term options every day could lead to the the leveraged funds underperforming Nvidia over longer periods of time. And even though the funds have grown substantially, they are still not as liquid as major index funds. Ed Egilinsky, head of sales and distribution at Direxion, said that, with any of these leveraged funds, investors should be aware of trading volumes and spreads in aftermarket and consider using limits in their orders. "When the market opens the following morning, that will probably be a truer test of where it is going to trade, relative to the aftermarket. But people can trade the aftermarket if they want as well. They just have to be aware of the fact that it might be more thinly traded," Egilinsky said. The cost could also be a a drag on long-term performance compared to just buying Nvidia outright or a cheaper form of ETF, like an index fund. All three long Nvidia funds have annual expense ratios above 1%. Morningstar's Armour pointed to leveraged ETFs that track gold mining stocks as an area where even the bullish funds have underperformed their reference index over time. "People tend to hear the stories about some sort of gambling success much more often than they do the failures. I think, people, their eyes widen when they see the potential and especially the historical performance," Armour said. Correction: Ed Egilinsky is head of sales and distribution at Direxion. An earlier version misspelled his name. Scott Acheychek is COO at Rex Financial. An earlier version misspelled his name.
