After investing a record amount in a leveraged ETF, a group of retail investors face huge losses as Nvidia's market cap drops by about $400 billion.
For short-term traders fueled by the AI-driven stock frenzy, leveraged ETFs are a profitable bet that can offer double-digit returns every week.
However, now, after investing a record amount in a leveraged ETF, a group of retail investors are facing huge losses as Nvidia's market cap drops by about $400 billion.$NVIDIA (NVDA.US)$The daily increase and decrease of the market value is twice as much as Nvidia's.
$GraniteShares 2x Long NVDA Daily ETF (NVDL.US)$Last week, as investors sought to expand the gains of the stock that is considered the world's "most important stock," the fund saw record inflows of $743 million. As it turns out, the timing was not right, and the fund has fallen about 25% since Tuesday's close. By 2024, the fund is still up about 329%.
David Lutz, ETF director of Jones Strading, said, 'Taking a leveraged position in Nvidia is a high-risk, high-reward play -- it's difficult to determine when the stock will finally pull back given the momentum and popularity it's enjoyed.' Retail traders need to truly understand the structure of these products to fully grasp the risks they carry.
The ill-timed investment frenzy last week highlighted the performance risks of investing in these high-intensity ETFs that use derivatives to boost returns or turn around performance. Reverse and leveraged ETFs are popular among day traders because they are designed for short-term holding. But their structure means they can bring both huge gains and losses rapidly.
The $3.7 billion ETF was launched in December 2022 and attracted around $189 million last year and approximately $1.8 billion in 2024.
As a representative of the AI boom, Nvidia's stock price has risen 140% this year. This chip maker has now become the second-largest weighting stock in the $700 billion market cap E Fund CSI Technology 50 ETF, accounting for over 20% of the ETF.$The Technology Select Sector SPDR® Fund (XLK.US)$The second largest weighted stock, accounting for over 20% of this technology ETF.
Meanwhile, investors who bet against Nvidia were hit hard this year, losing nearly 90% since the beginning of the year as tracked by the $93 million market cap fund that bets on the daily inverse returns of Nvidia's stock.$GraniteShares 2x Short NVDA Daily ETF (NVD.US)$Trade
Currently, Nvidia's stunning growth is pausing. The stock has entered correction territory on Monday, continuing its steep sell-off. After briefly holding the title of the world's largest stock last week, it has fallen more than 13% for three straight trading days, surpassing the 10% correction threshold.
Jane Edmondson, TMX VettaFi's head of thematic strategies, said, 'The time for a pullback in NVDA and its AI peers has come after a big run-up.' 'Investors may be taking profits off the table as the quarter ends and rebalancing their portfolio allocation. But the fundamental thesis remains intact.'
Edited by Jeffrey