ETFs
1 ETF I Wouldn’t Touch With a 10-Foot Post
Please think twice before trying to maximize your investment returns with this risky tool.
Chip designer Nvidia (NVDA -0.09%) is completely crushing the stock market these days. Nvidia stock provided a total return by 147% since the start of 2024, leaving the S&P500 (^GSPC -0.11%) far behind with a total return of 13%.
Nvidia’s price hikes have created a monster, however. And another beastly investment seems even bigger. I wouldn’t touch it with a 10-foot pole, a thousand-watt laser pointer, or an AI-generated digital finger.
Behind the curtains of Nvidia’s earnings
First of all. I’m impressed by Nvidia’s market mastery for artificial intelligence (AI) accelerator chips. The company’s A100 and H100 processors are found in many of the supercomputers that have formed today’s most powerful computers. generative AI systems, starting with ChatGPT from OpenAI. In the future, the Blackwell platform is expected to play a similar role in the next generation of large-scale AI systems.
So Nvidia’s stock is rising for all the right reasons, supported by incredible business results. Still, the AI boom may have driven Nvidia’s stock price higher and faster than it should, especially as every semiconductor company worth mentioning launches serious competitors to this company’s solutions.
In other words, I wouldn’t recommend buying Nvidia stock today. And I definitely want to stay away from the even more impressive gains of a certain exchange-traded fund (ETF), which takes Nvidia’s market returns and cranks the volume to 11.
THE ETF T-Rex 2x Long Nvidia Daily Target (NVDX -0.31%) is a Leveraged ETF, aiming to double the daily price movements of Nvidia shares. If Nvidia’s high valuation makes me nervous, the amped-up version of the T-Rex fund looks downright terrifying:
NVDX Total Return Level data by Y Charts
Advantages and disadvantages
The T-Rex ETF returns so far have been exciting. The fund has more than doubled Nvidia’s recent gains, and it’s easy to conclude that it will continue to gain in the long term. As long as Nvidia stock treats investors well, this amplified financial instrument should rise further.
But this approach has many drawbacks.
- Thrilling gains in good times are accompanied by steeper declines during market downturns. Remember the stock market crash of 2022, marked by inflation? THE Invesco QQQ Trust (QQQ -0.09%), which tracks the tech-heavy Nasdaq-100 index, fell 32.6% that year. The main 2x leveraged version of this fund, ProShares Ultra QQQ (Queensland -0.23%), plunged 60.5% over the same period. Now imagine a correction in Nvidia’s stock price, then double the expected pain. This is where the T-Rex ETF would go.
- Leveraged ETFs are inherently unstable animals. They were not designed to track long-term market returns, but to provide day trading speculators with another tool for their short-term trading.
- Some leveraged ETFs see limited trading volumes, which can leave you with no paddle when you want to sell your shares. The T-Rex 2x Nvidia fund is also rather small with just $525 million in assets under management, and it has only been around since last October.
Long story short, the T-Rex ETF looks great when the sun is shining, but you don’t want to own it while it’s raining on Wall Street. The leveraged fund didn’t exist in 2022, but Nvidia’s stock price fell 50.3% that year. You can’t really double down on prices without breaking basic mathematical laws: Stock and ETF prices can never be negative.
Potential Downside Catalysts
I’m not saying it will happen again, but economic drama can still undermine the growth-oriented tech sector without warning. And if Intel (INTC 1.05%) or Advanced microsystems (AMD 0.65%) begins stealing big AI accelerator contracts from Nvidia’s pocket? This is another non-zero risk.
So I highly recommend staying away from the T-Rex 2x Nvidia fund as the underlying stock hits this high. Yes, she could continue to win for a while and maybe even in the long term. But are you really prepared for the pain your portfolio would feel in the event of a significant price correction? Old Nvidia stocks can provide all the excitement you need to avoid risk, if you still insist that its market capitalization of $3 trillion can become even bigger.
Anders Bylund has positions in Intel and Nvidia. The Motley Fool holds positions and recommends Advanced Micro Devices and Nvidia. The Motley Fool recommends Intel and recommends the following options: long January 2025 $45 calls on Intel and short August 2024 $35 calls on Intel. The Motley Fool has a disclosure policy.