(Bloomberg) — For day traders riding the AI-powered stock mania, it was a unique bet that delivered double-digit returns week after week.
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But now — after pouring a record amount of cash into a leveraged ETF — a group of retail investors are facing big losses from the roughly $400 billion Nvidia Corp. bust.
The GraniteShares 2x Long NVDA Daily ETF (ticker NVDL), which delivers double the daily returns of the Jensen Huang-run firm, saw record inflows of $743 million last week as investors sought to magnify gains in what has been called the “most important of the world” is called. stock.” The timing has proven to be inopportune, as the fund is down about 25% since Tuesday’s close. In 2024, the gain is still about 329%.
“It’s a very high risk, high reward move that stacks up in leveraged NVDA positions – given the stock is driven by momentum and sentiment, so it’s hard to say when the stock will ultimately recover,” said Dave Lutz, head of ETFs. at Jones Trading. “Retailers really need to understand the structure of these products to fully understand the risks they pose.”
Last week’s ill-timed rush underlines the feast-or-famine performance risk when it comes to investing in this powerful ETF class, which uses derivatives to boost returns or reverse performance. Inverse and leveraged ETFs are popular among day traders because they are designed to be held for short periods of time. But their structure allows them to make both quick losses and big profits.
The $3.7 billion ETF, launched in December 2022, has raised about $1.8 billion in 2024, after raising $189 million last year.
Nvidia, the offspring of the AI craze, is up about 140% this year. The chipmaker has risen to the second-largest weighting in the $70 billion Technology Select Sector SPDR Fund (XLK), which comprises more than 20% of the tech ETF.
Meanwhile, the Nvidia bears have been crushed this year by the $93 million GraniteShares 2x Short NVDA Daily ETF (NVD), which tracks the daily inverse returns of the underlying stocks and is down nearly 90% this year.
For the time being, Nvidia’s spectacular rise is taking a breather. The stock entered correction territory on Monday when it experienced a sharp sell-off. After briefly claiming the title of the world’s largest stock last week, it has fallen 13% in three sessions, past the 10% threshold that represents a correction.
“NVDA and its AI colleagues were ripe for a correction after their enormous run-up,” said Jane Edmondson, head of thematic strategy at TMX VettaFi. “Investors will likely take some profits at the end of the quarter and recalibrate their portfolio allocations. But the underlying foundations are still there.”
–With help from Lu Wang.
(Updating shares.)
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