Comparative research between NVIDIA spot stocks and daily ETFs that provide double returns - isn't this what you want to know?

Should I invest in individual stocks or should I invest in leveraged ETFs for those stocks? Here's what you want to know.

From the beginning of the year 2024 to the end of market trading on 2024/6/4, NVIDIA (NVDA) stock prices showed a cumulative increase of 135.13%. Meanwhile, NVDL, which is currently the largest single stock ETF that follows NVIDIA's stock price, has recorded a cumulative increase of 326.29%.

(Data source: moomoo securities data is as of the end of the stock market on 2024/6/4. (This example is for illustrative purposes only, and does not mean investment advice or guarantee of profit.)

In addition to NVIDIA, stocks with large stock price fluctuations such as Tesla (TSLA), Coinbase (COIN), and Advanced Micro Devices (AMD) have also become new favorites for investors through single-share ETFs. According to data from the research company “Morningstar,” as of 2024/3, the 10 largest single-stock ETFs all had assets exceeding 100 million dollars.

(Data source: Morningstar Direct. The data is current as of 2024/3/31. Volatility data for NVDX and TSLT is not yet available.

While these ETF benefits may seem very appealing, they are not suitable for all investors. If you are considering trading such ETFs, we recommend that you familiarize yourself with the trading risks and various considerations before making an investment decision.

Single share ETFs were officially introduced in the American market in 2022. It appeared as a “newcomer” to ETF investment products, and its presence is outstanding. Whereas other ETFs track the prices of multiple assets such as multiple stocks, bonds, and commodities (commodities), single share ETFs track price movements of stocks of a single listed company. Furthermore, derivatives (financial derivatives) are also used to achieve leverage and short selling effects.

According to data from research firm Morningstar, there are approximately 60 single-stock ETFs in the American market as of 2024/3. These can be broadly categorized into two main types: leveraged and inverse ETFs and covered call ETFs. This classification allows us to better understand the rules of their operation and help us make informed choices.

Currently, most leveraged single share ETFs have leverage ratios of 1.25x, 1.5x, or 2x. This means that by purchasing these ETFs, future returns (profits) and risks (losses) can be expanded, and short selling is also possible without investing in margins.

For example, the NVDL (GraniteShares 2x Long NVDA Daily ETF) mentioned above aims to achieve double leverage by tracking NVIDIA's daily stock value movements. When NVIDIA's stock price rises by 1%, that day's NVDL also rises by 2%, and conversely, when NVIDIA's stock price falls by 1%, that day's NVDL also falls by 2%.

Thanks to NVIDIA's drastic rise, the asset size of this ETF has reached 1,999 million dollars (as of 2024/6/4), making it one of the most actively traded ETFs in this category (source: moomoo securities).

Inverse single share ETFs have leveraged and unleveraged options. Generally, these trading volumes and asset sizes are small compared to their leveraged long counterparts. For example, NVD is another ETF from the same issuer as NVDL, and NVD tracks NVIDIA's stock price. This is an inverse single stock ETF with 2x leverage. When NVIDIA's stock price falls 1%, that day's NVD rises by 2%, and conversely, when NVIDIA A's stock price rises by 1%, that day's NVD falls by 2%.

Interestingly, NVD's asset size is only $309.024 million (as of 2024/6/4), which is significantly smaller compared to NVDL, which is 2 times longer. However, every time NVIDIA's stock price fluctuates, its trading volume increases rapidly.

In order to know how these ETFs achieve leverage and inverse effects, it is easy to understand by looking at the assets they hold. You can check the ETF's “holding status” by searching for the ETF name on the Moomoo app and selecting “ETF Overview” from the top navigation bar.

For example, as shown in the image below, this ETF has achieved double leverage by mainly borrowing funds and trading swap agreements.

(*Data source: moomoo securities data is as of the stock market close on 2024/6/4. (This example is for illustrative purposes only, and does not mean investment advice or guarantee of profit.)

ETFs are explained in a course called “ETF Basics” in “Learn to Invest” in the PC version of the MooMoo app.

The following describes the benefits and risks of ETFs.

Leveraged ETFs magnify future gains, but so do future losses.

For example, from 2024/1 to 2024/6/4, Tesla's stock price fell 29.66% cumulatively. Meanwhile, TSLL, which is a 2-fold leveraged ETF that tracks Tesla's stock price, fell 48.17% over the same period. Check out the chart here. Leveraged ETFs will mercilessly expand losses if the underlying stock does not move in the expected direction. Since such ETFs have characteristics, investors who buy this type of ETF must have sufficient stock analysis skills and also have the decisiveness to cut losses as soon as necessary.

(*Data source: Moomoo Securities data as of stock market closing on 2024/6/4. (This example is for illustrative purposes only, and does not provide investment advice or guarantee of profit.)

　Leveraged ETFs and inverse ETFs are based on the daily performance of stock prices. Generally, these types of ETFs work well in trending markets. However, when the direction of stock prices is unclear or fluctuates, the performance may fall short of expectations.

　Take Coinbase, for example. From 2024/1/2 to 2024/3/11, Coinbase's stock price rose 46.14% due to the rapid rise in the crypto asset Bitcoin, and CONL, which is a double leveraged ETF, recorded an 116.8% increase.

　However, once the price of Bitcoin stabilized, Coinbase's stock price entered a range exchange rate. During this period, during a period of large fluctuations in Coinbase's stock price, CONL experienced a major drawdown compared to the underlying stock price. From 2024/3/25 to 6/4, Coinbase's stock price fell 6.79%, while CONL also fell 21.59%. This was a drop of about 3 times the underlying stock price.

(*Data source: Moomoo Securities data as of stock market closing on 2024/6/4. (This example is for illustrative purposes only, and does not provide investment advice or guarantee of profit.)

The above facts also indicate that these types of ETFs are more suitable for investors with sufficient market experience.

　If you want to trade these ETFs, it's wise to closely monitor the stocks and related assets that underlie the price and adjust positions in a timely manner to prevent major losses.

Based on the two points mentioned so far, leveraged ETFs and inverse ETFs are suitable for seizing short-term trend opportunities. Holding these over the long term involves a relatively high risk.

　Some of you may have noticed that certain single-stock ETFs have shown surprisingly high dividend yields. However, it's important to remember that this value fluctuates and may not last long term. If your goal is to earn stable dividends, it may be smarter to make traditional investments with high dividends and no leverage.

If the trading volume is low and its performance is insufficient to maintain operations, there is a possibility that ETFs will be delisted.

For general investors, the advantages and disadvantages of comparing a single share stock ETF and underlying stock margin trading (margin trading) are as follows:

It's easier to get started compared to basic spot stocks

There is no need to open a margin trading account

There is no interest on margin

There are no margin requirements, and maximum losses are limited to the invested capital, so there are no forced settlements or proofs

There is an error in price tracking, and stock price movements cannot be fully tracked

Track only the daily price changes of the underlying stock

Since single-stock ETFs are not compatible with only a small number of stock stocks, the options available are limited

The maximum leverage is limited to 2 times

ETF management and operation fees are charged

Overall, both margin trading and single stock ETF trading involve relatively high risk. However, single-stock ETFs are more speculative in nature. If you want to seize short-term investment opportunities in famous stocks with a small amount of capital, if you want to avoid paying credit margin interest, or if you don't want to put cash or stocks as collateral, a single-stock ETF may be more suitable. On the other hand, if you are very bullish on a specific stock and want to hold it for a long time, it is a good idea to buy the underlying stock in kind. You can choose higher leverage for margin trading, but keep in mind that interest will increase as you hold it for a long time.

In addition to leveraged ETFs and inverse ETFs, there are also covered call ETFs based on a single individual stock.

If you're familiar with options, you probably know about options strategies that have a history called covered calls. Simply put, a covered call is buying an underlying stock and selling a similar amount of call options. Based on the assumption that stocks are performing well in the long term, this strategy can help hedge against short-term declines in stock prices. The advantage of this strategy is that you can get a premium call option when the price of the underlying stock falls or remains flat. Conversely, when stock prices rise, it is necessary to close option positions or sell stocks at strike (exercise of rights) prices, limiting the risk of falling at the expense of part of the stock price increase.

As the name suggests, a covered call ETF can be created by applying this covered call strategy to financial products.

Covered call ETFs have existed for a long time, but most of them are used to hedge stock indices and similar assets. For example, QYLD (Global X Nasdaq 100 Covered Call ETF) was extremely popular by hedging the volatility of the Nasdaq 100 Index during the slump in the US stock market. However, since single stock (single stock) covered call ETFs are new compared to leveraged and inverse single stock (single stock) ETFs, the transaction volume and asset size are often small.

Using these ETFs, you can get similar price hedging effects without trading options, which is convenient. Also, many of these ETFs distribute monthly dividends, and the specific amount depends on the ETF's performance in the previous month. High dividend yields are also attracting many investors.

(*This example is for illustrative purposes only, and does not mean investment advice or guarantee of profit.)

In a normal covered call strategy, stocks that are the basis of the price are bought and held in kind. Covered call ETFs linked to many asset baskets and stock price indices also hold stocks that underlie prices. However, many single-stock covered call ETFs do not hold the underlying stock in kind, and instead hold many low-risk fixed income assets such as government bonds and Treasury securities. These ETFs also include options such as put options that are not limited to call options. For example, the following two ETFs have published a detailed breakdown of the assets they hold, and you can see which options they hold and in what quantity. From the name of the option, you can determine its strike price, expiration date, and direction.

(*This example is for illustrative purposes only, and does not mean investment advice or guarantee of profit.)

Due to strategic restrictions, when stock prices are on a one-sided upward trend, many single stock (single stock) covered call ETFs do not show as much increase as individual stocks. For example, NVIDIA and NVDY (yieldMax NVDA Option Income Strategy ETF).

(*Data source: Moomoo Securities data as of stock market closing on 2024/6/5. (This example is for illustrative purposes only, and does not provide investment advice or guarantee of profit.)

Single stock covered call ETFs are also considered relatively high-risk ETFs. For ordinary investors, the main risks to be aware of are:

If stock prices fall continuously and drastically, there is a possibility that profits obtained from covered call strategies used for hedging will not fully offset the risk of falling stock prices. As a result, these ETFs may incur losses or not pay dividends as expected. Additionally, these ETFs may face the risk of suspension of trading or delisting.

Options themselves are relatively complex financial products, and not all ETF options strategies are effective. Therefore, the performance of different covered call ETFs may vary. Most ETFs perform worse than underlying stocks, but depending on the fund manager's investment skills, they may also perform better than stocks.

For example, two single-stock covered call ETFs issued by the same issuer (one ConY tracking Coinbase and one PyPy tracking PayPal) have shown markedly different performance.

(*Data source: Moomoo Securities data as of stock market closing on 2024/6/5. (This example is for illustrative purposes only, and does not provide investment advice or guarantee of profit.)

Comparing these two cases, it can be concluded that single stock covered call ETFs tend to perform better than the underlying stock when the stock price is fluctuating or falling. However, the overall performance direction is still consistent with the underlying stocks.

We have selected the 9 most popular star companies that have received a lot of attention from ordinary investors. Typical single-stock ETFs (as of 2024/6/5 closing price) with asset sizes over 50 million dollars based on different types were filtered and given as examples for reference. (Currently, reverse single-stock ETFs do not appear on the list due to their small asset size. (If you're interested, search for keywords such as “stock ticker” or “stock ticker” + “short” on moomoo.)

Typical single-stock ETFs (as of 2024/6/5 closing price) with asset sizes over 50 million dollars based on different types were filtered and given as examples for reference. (Currently, reverse single-stock ETFs are not listed due to their small asset size. (If you're interested, search for keywords such as “stock ticker” or “stock ticker” + “short” on moomoo.)