ETFs
NVDA Stock Split and Leveraged ETF: Risky Journey
Nvidia
While Nvidia Corp. heads toward a 10-for-one stock split after the market closes Friday, questions are mounting about how far this barometer of investor enthusiasm for artificial intelligence will go.
Currently trading at over $1,200 per share, Nvidia has gained nearly 150% this year and is up more than 210% over the past 12 months. Out of 41 analyst recommendations, 36 rate the stock a Buy according to Yahoo Finance, and the stock split should largely boost the shares further.
For financial advisors and ETF investors, the landscape is rife with opportunities to place leveraged bets for and against one of the most impressive stock market stories in recent memory. For the most ardent believers, there are several single-stock ETFs offering to increase 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) is up nearly 460% over the past 12 months.
NVDL 1 year Performance
To be clear, leveraged ETFs reset daily and are therefore designed as trading vehicles that are not recommended for long-term investors.
However, as the saying goes when it comes to leveraged strategies, the trend is your friend, which is illustrated by the fact that leveraged ETFs outperform by around 100 percentage points, or twice the performance Nvidia shares.
Nvidia ETFs offer leverage
“If you go with a daily reset product and the underlying continues to rise, you can outperform the market,” said Scott Acheychek, chief operating officer of Miami-based Rex Shares.
Acheychek, who stressed that leveraged ETFs are not designed to be held for more than a few days, believes momentum remains behind Nvidia.
“I’m having a hard time finding reason to be pessimistic about Nvidia,” he said. “There is a great passion for detail behind the title.”
Acheychek said he started seeing NVDX buybacks before Nvidia results for May 22 report, which included a year-over-year revenue increase of 262% and a year-over-year profit of 629%.
“Inflows are picking up again,” he said of the $554 million NVDX.
Some of these recent inflows are likely attributable to Nvidia’s stock split, which has no impact on the company’s overall valuation, but Stock distribution tend to attract the interest of individual investors.
“Stock splits are just an accounting trick that appeals to investors’ minds,” said Nick Codola, senior portfolio manager at Orion Advisor Solutions in Omaha, Neb.
Kent Thune, head of research at etf.com, also doesn’t see the stock split as a reason to join the Nvidia party.
The story continues
“It’s not a popular opinion currently, but I wouldn’t be surprised if the Nvidia split marks a record price, at least for several weeks,” he said.
Citing Nvidia’s recent string of positive news, Thune said the company “may not have another surprise up its sleeve to maintain high expectations and stock price momentum for a while.”
This presents the flip side of getting stuck in a leveraged ETF designed for day traders.
Take, for example, the brutal 20% decline in Nvidia stock between March 25 and April 19. This decline amounted to a 38% drop in the double-leveraged NVDL fund over the same period.
“If anyone bought during that time, they’re not very happy,” said Ed Egilinsky, chief executive of New York-based Direxion.
“That’s the power of compounding when the trend is your friend, but you have to monitor these things day by day,” he added. “It’s foolish gold to hold on to them indefinitely, unless you think the trend will continue.”
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