While Nvidia Corp. heading for a 10-to-1 stock split after the market close on Friday, questions arise about how far this barometer of investor enthusiasm for artificial intelligence will go.
Currently trading at over $1,200 per share, Nvidia has gained almost 150% this year and is up over 210% over the past twelve months. Of 41 analyst recommendations, 36 rate the stock as a Buy according to Yahoo Finance, and the stock split is widely expected to further boost the stock.
For financial advisors and ETF investors, the landscape is full of leveraged opportunities to bet for and against one of the most impressive stock stories in recent history. For the most ardent believers, there are several single-stock ETFs that can boost this performance.
The T-Rex 2X Long Nvidia Daily Target ETF (NVDX) is up about 400% this year. The GraniteShares 2X Long Nvidia Daily ETF (NVDL) has risen almost 460% in the past twelve months.
NVDL 1 year Performance
To be clear, the leveraged ETFs reset daily and are therefore designed as trading vehicles not recommended for long-term investors.
But as the saying goes when it comes to leveraged strategies, the trend is your friend, which is illustrated by the fact that the leveraged ETFs outperform the performance of Nvidia stock by about 100 percentage points.
Nvidia ETFs offer leverage
“If you’re in a daily-resetting product and the underlying asset continues to rise, you can outperform the market,” said Scott Acheychek, chief operating officer of Miami-based Rex Shares.
Acheychek, who emphasized that the leveraged ETFs are not designed to be held for more than a few days, believes the momentum remains behind Nvidia.
“I’m struggling to find much to be bearish on when it comes to Nvidia,” he said. “There is a big retail rush behind the shares.”
Acheychek said he started seeing redemptions from NVDX ahead of Nvidia’s May 22 earnings report, which included a 262% year-over-year revenue spike and 629% year-over-year gain.
“Inflows are picking up again,” he said of the $554 million NVDX.
Some of this recent inflow is likely due to Nvidia’s stock split, which has no impact on the company’s overall valuation, but stock splits typically generate interest among retail investors.
“Stock splits are just an accounting trick that appeals to the investor psyche,” says Nick Codola, senior portfolio manager at Orion Advisor Solutions in Omaha, Neb.
Kent Thune, research leader at etf.com, also does not bite on the stock split as a reason to join the Nvidia party.
“This is not a popular view at the moment, but I wouldn’t be surprised if the Nvidia split meant a price top, at least for a few weeks,” he said.
Citing the recent string of positive Nvidia news, Thune said the company “may not have another surprise in store to sustain high expectations and share price momentum for quite some time.”
That introduces the nasty downside of being tight in leveraged ETFs designed for day traders.
Take, for example, the abrupt 20% drop in Nvidia stock from March 25 through April 19. That pullback rose to a 38% decline over the same period from the dual-leverage NVDL fund.
“If someone bought something in that time, they’re not very happy,” said Ed Egilinsky, chief executive of New York-based Direxion.
“It’s the power of compounding when the trend is your friend, but you have to keep an eye on these things day to day,” he added. “It’s fool’s gold to hold this indefinitely unless you believe the trend will continue.”
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