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Leveraged ETFs are more complicated than they may seem.
It seems everyone wants to know how to make more money with Nvidia (NVDA 1.46%) stock. After all, its share price has skyrocketed by more than 900% in less than two years, making countless investors wealthier.
So, what if I told you there was a new exchange-traded fund (ETF) designed to double the returns on Nvidia stock?
Image source: Getty Images.
What is the GraniteShares 2x Long NVDA Daily ETF?
The leveraged ETF in question is the GraniteShares 2x Long NVDA Daily ETF (NVDL 2.89%). It’s operated by GraniteShares, a privately held ETF provider that “focuses on innovative, cutting-edge investment solutions.” The company was founded in 2016.
As for the ETFits stated investment objective is simple: “The Fund seeks daily investment results, before fees and expenses, of 2 times (200%) the daily percentage change of the common stock of NVIDIA.”
Soin theory, quite straightforward. Investors can expect to take the daily return of Nvidia and then double itright?
Not exactly — and that’s where things get more complicated.
How and why leveraged ETFs aren’t as simple as they seem
For starters, it’s important to remember what should be obvious — double returns means both greater gains and greater losses. After all, Nvidia — just like any other stock — can go up and down in price. If it plummets, then this fund will plummet even more sharply.
Second, let’s remember what the GraniteShares 2x Long NVDA Daily ETF is promising to do (emphasis mine): “The fund seeks daily investment results…”. That means it is designed to follow the one-day performances of Nvidia — not its weekly or monthly performances. Over longer periods of time, the fund’s performance may not match the performance of the stock.
Third, let’s examine another key phrase from the fund’s investment objective (emphasis mine): “The Fund seeks daily investment results, before fees and expensesof 2 times (200%) the daily percentage change of the common stock of NVIDIA.” Granted, all ETFs charge fees, but this one’s expense ratio is a whopping 1.15%. That means that a $10,000 investment in this fund will result in $115 per year in fees. By contrast, buying and holding Nvidia shares costs nothing (aside from whatever transaction fees might be charged by your broker, if any). And Nvidia pays a modest dividend, meaning shareholders actually get paid to own the stock.
Next, there’s the question of performance. Here’s a three-month chart comparing Nvidia’s performance to the fund’s.
NVDA Total Return Level data by YCharts.
As you can see, the ETF did not generate twice the return of Nvidia shares over the last three months. Some of the shortfall was due to fees; some was due to complicated factors relating to options decay and compounding that I won’t go into here. In any event, the key takeaway is that at various times over the last three months, the returns from owning shares of the fund were almost identical to the returns from owning Nvidia stock — even though investors might have expected much better returns on their investment.
This all leads to the final — and most important — takeaway: This fund is not designed for investors — it’s meant for traders.
Again, this caveat is included in the fund’s investment prospectus: “The Fund should not be expected to provide 2 times the cumulative return of NVDA for periods greater than one day.”
In other words, this fund is designed to help traders boost their returns or hedge other positions in a portfolio. Long-term, buy-and-hold investors, be aware — the GraniteShares 2x Long NVDA Daily ETF is not the best way to profit from Nvidia. If that’s your goal, simply buy shares of the stock.