Supercharged Tesla and Nvidia bets sold through single-stock ETFs

US traders willing to stomach the risks of devastating losses in hopes of lucrative short-term gains can now double their bets on Tesla and Nvidia’s volatile stocks, as asset managers add new products to a market that has boomed despite negative returns.

These “leveraged” exchange traded funds are collections of securities that employ derivatives to amplify long or short returns. Asset managers are narrowing their scope to individual company names with the launch of single-stock leveraged ETFs.

Earlier this month, REX Shares and Tuttle Capital Management launched four ETFs to allow wagers on the price of electric-car company Tesla or chipmaker Nvidia in the form of an ETF wrapper. Two products offer double the daily amount that the stock prices go up, and the two other so-called inverse products that pay out double if the underlying stock prices fall. Losses are also double for traders betting the wrong way.

The creations are a far cry from the original ETFs, which were designed to hold baskets of securities and be easily traded on a stock exchange. About 30 single-stock ETFs containing $1.7bn in assets have become available in the US since the products were first introduced last year, according to Morningstar data.

The four new products tracking Tesla and Nvidia, trading under the T-REX brand, gain exposure through swap contracts with large financial institutions, rebalancing at the end of each day in order to maintain their target levels of leverage, according to regulatory filings.

Tesla and Nvidia are volatile stocks. The carmaker has moved more than 10 per cent on several occasions this year. The chipmaker jumped 24 per cent in a single day in May.

“Every day the volume has increased and more market makers are moving into the products,” said Matthew Tuttle, chief executive of his eponymous company, regarding the new products. A spokesperson added that the T-REX 2x Long Tesla Daily Target ETF (TSLT) experienced record trading volume on Monday, citing data from Yahoo Finance.

Leveraged ETFs tracking broad indices, commodities and other markets have been around for years and now comprise a $69bn industry in the US. A typical leveraged ETF is meant to provide its given level of leverage only for a single day before resetting, as financial compounding will drag on its returns over longer periods of time, said Bryan Armour, Morningstar’s director of passive strategies research.

“Leveraged and inverse ETFs have left many investors bloodied,” Armour said. “These are dangerous products that face significant risk in the short-term and are not intended to be held long-term.”

Leveraged ETFs have a negative combined rate of return over the past decade, Armour said. They have attracted a net $5.9bn in new money this year, according to data from Morningstar, well below 2022’s record of $22.6bn.

Leveraged ETFs in the US have long been the domain of two firms, ProShares and Direxion. Reforms enacted by the Securities and Exchange Commission in 2019 that eased the launch of new ETFs included changes that addressed leveraged ETFs.

Senior SEC officials have since sounded alarms about leveraged ETFs and single-stock ETFs more specifically. An advisory group to the regulator in June argued single-stock ETFs and leveraged ETFs are “functionally not the same product” as traditional ETFs, leading to “investor confusion and unnecessary loss of capital from self-directed investors failing to understand the payouts and risks”.

“Because leveraged single-stock ETFs in particular amplify the effect of price movements of the underlying individual stocks, investors holding these funds will experience even greater volatility and risk than investors who hold the underlying stock itself,” the SEC said in an August statement.

Advocates of leveraged ETFs argue they fill a niche for savvy traders who are keyed in on daily developments and are poised to respond quickly to the movement of markets and individual stocks.

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“There’s a lot of hysteria around this,” said Will Rhind, founder and CEO of GraniteShares, which earlier this year launched an ETF with 1.75x long Tesla exposure.

“I think there is a natural bias towards long-term buy-and-hold when people think about asset management,” Rhind added. “Individual investors are taking more and more control over their financial lives.”

Leveraged products have recently attracted retail investors in South Korea. Investors in Europe have for years had a wider array of products and leverage to choose from than their US counterparts — exchange traded strategies from London-based Leverage Shares, for example, offers triple short and long exposure to a range of individual stocks and funds.

While the main audience for the products remains sophisticated professional traders, interest among retail investors and day traders in leveraged ETFs has increased since the early days of the Covid-19 pandemic, said Ed Egilinsky, head of sales and distribution and head of alternative investments at Direxion.

“People are going to have opinions,” he said, “and these are tools.”