NVDL - NVDU: Boosting And Protecting Your Nvidia Holding With A Leveraged ETF
2024-04-30 01:23:02 ET
Summary
- A pairing of NVDA with a leveraged or non-leveraged single-stock ETF like NVDU or NVDL can both boost as well as safeguard your core holding of NVDA stock.
- Volatility drag can lead to a decay in overall return without investors realizing it, but be aware of all the risks, as outlined here.
- Liquidity of ETF shares can be low, making it difficult to open or offload large positions quickly, so it's important to choose the right one.
In one of my first Seeking Alpha articles - about the T-Rex 2X Long NVIDIA Daily Target ETF ( NVDX ) - I mentioned several risks that investors should be aware of when looking at leveraged ETFs. Here's a snapshot of what I said in that article (although I encourage you to read it):
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The leverage works both ways, so your 'down days might undo and overwhelm your 'up' days if you hold such securities for extended periods of time.
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Due to the daily reset for these ETFs, a 10% gain on day one will NOT fully offset an equal loss on day two. With a $100 investment, you might gain $10 on the first day, but you'd lose $11 on the second.
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Volatility drag can cause a decay in your overall return without you realizing it. I'll give a different example here:
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Consider a $100 investment that records a 60% gain on day one and loses 40% on day two.
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Calculating your simple average return uses this formula: [60%-40%/2], so it looks like a 10% daily average return.
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However, your actual daily average return looks like this: [Exit Value - Original Investment/Original Investment], so [$96-$100/$100], which is -4%. This happens because your investment at the end of the first day is $160, but losing 40% on that, or $64, brings your exit value down to $96, which is a -4% return. You're losing money even though your day one return is 50% higher than your day two loss.
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The effect of this worsens the more volatile your investment is, and NVDA, which is the sole underlying asset in a single-stock leveraged ETF like NVDX, has a beta of 1.74 as I write this.
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Another risk is the liquidity of the ETF shares; low liquidity means you likely can't open with a large position, and it's going to be hard to offload that in a hurry.
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The SEC's Office of Investor Education and Advocacy clearly warns investors that leveraged one-stock ETFs like these tend to amplify your risk as well as the volatility of the security, not to mention that it lacks the benefit of diversification, which is often a highly underrated element for any portfolio. Additional risks are listed here by the SEC.