How ETFs Can Help Capture Trending Themes
NVDA or NVDL? Choosing Between Stocks and 2x Leveraged Single-Stock ETFs
From the start of 2024 to June 4th, NVIDIA's (NVDA) stock has surged by 135.13%. Meanwhile, NVDL, the largest single-stock ETF tracking NVIDIA, has skyrocketed by 326.29%.
(Source: moomoo. Data as of market close on June 4, 2024. The company mentioned is for illustration purposes only, and any statement involved does not constitute investment advice.)
Besides NVIDIA, other volatile stocks like Tesla (TSLA), Coinbase (COIN), and AMD (Advanced Micro Devices) also have single-stock ETFs that have become popular among investors.
According to Morningstar, by March 2024, the top 10 single-stock ETFs each had assets exceeding $100 million.
(Source: Morningstar Direct. Data as of March 31, 2024. Volatility data for NVDX and TSLT is not yet available. https://www.morningstar.com/funds/most-investors-single-stock-etfs-are-best-left-alone)
While these impressive gains might catch your eye, it's important to know that these ETFs aren't suitable for everyone. If you're considering trading these types of ETFs, make sure to understand the risks and key considerations before making any decisions.
How do single-stock ETFs work?
Single-stock ETFs are a relatively new addition to the U.S. market, debuting in 2022. Unlike other ETFs that track a basket of stocks, bonds, or commodities, single-stock ETFs focus on the performance of just one company's stock. They can even use derivatives to leverage or short the stock.
According to Morningstar, as of March 2024, there are nearly 60 single-stock ETFs in the U.S. market. We can broadly categorize them into two main types: Leveraged and Inverse ETFs, and covered call ETFs. Understanding these categories can help you make better investment decisions.
Leveraged and inverse ETFs
Most leveraged single-stock ETFs offer leverage ratios like 1.25x, 1.5x, or 2x. This means that by investing in these ETFs, you can amplify potential gains and losses or even short a stock, without directly using margin.
For example, the NVDL (GraniteShares 2x Long NVDA Daily ETF) aims to deliver twice the daily performance of NVIDIA’s stock. If NVIDIA’s stock goes up by 1%, NVDL would increase by 2% for that day, and vice versa if the stock goes down.
Thanks to NVIDIA's surge, NVDL’s assets have reached $1.999 billion as of June 4, 2024, making it one of the most actively traded ETFs in its category.
Inverse single-stock ETFs can also be leveraged or non-leveraged, but they typically have lower trading volumes and asset sizes compared to bullish leveraged ETFs. For instance, NVD, from the same issuer as NVDL, is a 2x leveraged inverse ETF tracking NVIDIA’s stock. If NVIDIA’s stock drops by 1%, NVD would rise by 2% for that day, and vice versa if the stock rises.
Interestingly, NVD has assets of only $30.9024 million as of June 4, 2024, significantly less compared to the bullish NVDL. However, its trading volume spikes when NVIDIA’s stock fluctuates.
How do these ETFs achieve their leverage and inverse effects? You can find out by looking at their holdings. On moomoo, search for the ETF’s name, and tap on the ETF > Fund > Breakdown to view details about its holdings.
For example, as shown below, this ETF primarily achieves 2x leverage through borrowing funds and trading swap contracts.
（*The ETF mentioned is for illustration purposes only, and any statement involved does not constitute investment advice.）
Trading risks and important considerations
We discussed the risks of leveraged and inverse ETFs in detail in our course "ETF Complete Guide". Here's a brief overview with examples. For a deeper understanding, feel free to take our free course.
Leverage ETFs could amplify losses if the market moves against you
Leveraged ETFs magnify both gains and losses. For example, from January to June 4, 2024, Tesla's stock fell 29.66%, while the 2x leveraged ETF TSLL dropped 48.17%. If the stock moves against your prediction, losses are significantly amplified. Thus, investing in these ETFs requires strong stock analysis skills and quick decision-making to cut losses.
(Source: moomoo. Data as of market close on June 4, 2024. The company mentioned is for illustration purposes only, and any statement involved does not constitute investment advice.)
Underperformance in Sideways Markets
Leveraged and inverse ETFs track daily stock performance and excel in trending markets but may underperform in sideways or volatile markets.
For instance, from January 2 to March 11, 2024, Coinbase's stock rose 46.14%, and its 2x leveraged ETF, CONL, surged 116.8%. However, as Bitcoin's rally slowed and Coinbase's stock traded sideways, CONL experienced larger drawdowns. From March 25 to June 4, Coinbase fell 6.79%, while CONL dropped 21.59%, nearly three times the stock's decline.
(Source: moomoo. Data as of market close on June 4, 2024. The company mentioned is for illustration purposes only, and any statement involved does not constitute investment advice.)
These ETFs are better suited for experienced investors. If you trade these ETFs, closely monitor the underlying stock and related assets to adjust positions and prevent significant losses.
Leveraged and inverse ETFs are not suitable for long-term holding
Due to the factors mentioned earlier, leveraged and inverse ETFs are better suited for capturing short-term market movements. Holding these ETFs long-term involves higher risks.
Some investors might be attracted to the high dividend yields displayed by certain single-stock ETFs. However, these yields can fluctuate and may not be sustainable over the long term. For those seeking stable dividends, traditional high-dividend, non-leveraged ETFs are generally a safer choice.
Delisting risk
An ETF with low trading volume and poor performance may face the risk of being delisted.
Leveraged single-stock ETFs vs. margin trading the stock
For ordinary investors, here are the pros and cons of trading leveraged single-stock ETFs compared to margin trading the stock directly:
Advantages
Lower entry barrier: The cost to invest in a single-stock ETF is generally lower than buying the actual stock on margin.
No need for margin account: You don't need to open a margin account to trade leveraged ETFs.
No margin interest: There are no interest charges associated with leveraged ETFs, unlike margin trading.
No margin calls: The maximum loss is limited to your initial investment. You won’t face margin calls or be forced to add more collateral.
Disadvantages
Tracking error: Leveraged ETFs may not perfectly track the stock's performance.
Daily tracking: These ETFs are designed to track the stock's daily performance, not long-term movements.
Limited options: There are fewer single-stock ETFs available, and many stocks don't have corresponding ETFs.
Leverage limit: Most single-stock ETFs offer up to 2x leverage, which may be limiting for some investors.
Management fees: You’ll need to pay ETF management and operational fees.
In summary, both margin trading stocks and trading single-stock ETFs carry relatively high potential risks. However, single-stock ETFs tend to be more speculative.
Single-Stock ETFs: These are more suitable if you want to leverage a small amount of money to capture short-term opportunities in high-profile stocks without paying margin interest or collateralizing your holdings.
Direct Stock Trading: If you have a strong long-term conviction in a particular stock, trading the stock directly is generally better. While margin trading can offer higher leverage, keep in mind that the longer you hold, the more interest you will accumulate.
In essence, choose single-stock ETFs for short-term, speculative plays with lower initial capital, and opt for direct stock trading if you plan to hold the stock long-term and can manage the potential interest costs of margin trading.
Covered call ETFs focusing on single stocks
In addition to leveraged and inverse ETFs, there are also covered call ETFs that focus on single stocks.
What is a covered call ETF?
A covered call ETF utilizes the classic options strategy known as the covered call.
This strategy involves buying the underlying stock and selling an equivalent number of call options. The idea is to hedge against short-term declines in the stock's price while generating income from the option premiums.
The trade-off is that if the stock price rises, you may have to sell the stock at the strike price of the sold call option. In other words, you choose to cap your upside potential in exchange for limited risk.
Covered call ETFs have been around for a while, primarily used to hedge against the volatility of stock indices or baskets of assets. A notable example is the Global X Nasdaq 100 Covered Call ETF (QYLD), which gained popularity during market downturns for its ability to hedge against the Nasdaq 100 index's fluctuations.
Why consider covered call ETFs?
Covered call ETFs allow investors to benefit from this strategy without directly trading options. They are particularly useful for those who are bullish on a stock's long-term prospects but want to mitigate short-term risks.
Additionally, these ETFs typically distribute monthly dividends, which attract many income-focused investors. The dividend amount depends on the ETF's performance over the previous month.
（*The ETF are for illustration purposes only, and any statement involved does not constitute investment advice.）
What's special about single-stock covered call ETFs?
Single-stock covered call ETFs are a more recent development compared to their leveraged and inverse counterparts and broad-market covered call ETFs. Consequently, these ETFs generally have lower trading volumes and smaller asset sizes.
Also, many single-stock covered call ETFs do not hold the stock itself. Instead, they may hold a large amount of low-risk fixed-income assets like government bonds or treasury bills, and may include a mix of call and put options to achieve their income objectives.
For example, by examining the holdings of the following two ETFs, you can see the specific options and quantities they hold. The names of the options provide information about their strike prices, expiration dates, and types.
（*ETFs are for illustration purposes only, and any statement involved does not constitute investment advice.）
Compared with the underlying stock, single-stock covered call ETFs often underperform their stocks during strong upward trends in the stock price due to the strategy's nature. For instance, the YieldMax NVDA Option Income Strategy ETF (NVDY) lags behind the Nvidia stock.
(Source: moomoo. Data as of market close on June 5, 2024. The company mentioned is for illustration purposes only, and any statement involved does not constitute investment advice.)
Trading risks and considerations
Single-stock covered call ETFs are relatively high-risk investments. Here are two main risks that ordinary investors should be aware of:
Covered Call strategy may not hedge all risks
When the market experiences sustained and significant declines, the income generated from the covered call strategy may not fully offset the downside risk, leading to potential losses or the inability to pay dividends as expected. Additionally, these ETFs may face the risk of trading halts or delisting.
Unstable dividend payments
Options are inherently complex instruments, and not all option strategies within ETFs are effective. As a result, the performance of different covered call ETFs can vary, depending largely on the investment skill of the fund manager. Only a few might outperform the underlying stock.
For example, two single-stock covered call ETFs from the same issuer—CONY (tracking Coinbase) and PYPY (tracking Paypal)—show significantly different performances.
(Source: moomoo. Data as of market close on June 5, 2024. The company mentioned is for illustration purposes only, and any statement involved does not constitute investment advice.)
From these cases, we might infer that single-stock covered call ETFs may perform better than the underlying stock when the stock price is volatile or declining, but their overall direction remains aligned with the underlying stock.
Popular stocks and corresponding single-stock ETFs
We have selected nine high-profile companies that are highly regarded by ordinary investors. For each company, we have identified representative single-stock ETFs with asset sizes exceeding $50 million as of the close on June 5, 2024.
These ETFs are categorized by the strategy they use.
(Note: Inverse single-stock ETFs have smaller asset sizes and are not included in this list. If you're interested, you can search for keywords like their symbol or "stock symbol + short" on moomoo to find them. The list of ETFs is for illustration purposes only, and any statement involved does not constitute investment advice.)
