NVDA Stock Split and Leveraged ETFs' Risky Ride

NVDA Stock Split and Leveraged ETFs' Risky Ride

Nvidia ETFs push the limits of the stock's rally heading into 10-for-1 stock split Friday.

Wealth Management Editor
Reviewed by: etf.com Staff
Edited by: Ron Day

As Nvidia Corp. heads toward a 10-for-one stock split after the market closes on Friday, questions are mounting as to how far this barometer for investors' enthusiasm for artificial intelligence will run.

Currently trading at more than $1,200 a share, Nvidia has gained almost 150% this year, and is up more than 210% over the past 12 months. Of 41 analyst recommendations, 36 rate the stock a buy according to Yahoo Finance, and the stock split is widely expected to boost the shares further.

For financial advisors and ETF investors, the landscape is flush with opportunities to place leveraged bets for and against one of the most impressive stock stories in recent memory. For the most ardent believers, there are several single-stock ETFs offering to lever up that 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-Yr Performance

To be clear, the leveraged ETFs reset daily and, thus, are 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 the leveraged ETFs are outperforming by about 100 percentage points two times the performance of Nvidia’s stock.

Nvidia ETFs Offer Leveraged Ride

“If you’re in a daily-resetting product and the underlying keeps going up you can outperform the marketplace,” said Scott Acheychek, chief operating officer of Miami-based Rex Shares.

Acheychek, who emphasized that the leveraged ETFs are not designed to be held more than a couple days, believes the momentum remains behind Nvidia.

“I struggle to find much to be bearish about regarding Nvidia,” he said. “There’s a big retail fever pitch behind the stock.”

Acheychek said he started to see redemptions from NVDX leading up to Nvidia’s May 22 earnings report, which included a year-over-year revenue spike of 262% and year-over-year earnings of 629%.

“The inflows are ramping up again,” he said of the $554 million NVDX.

Some of those recent inflows are likely attributable to Nvidia’s stock split, which has no impact on the company’s overall valuation, but stock splits tend to spark interest among retail investors.

“Stock splits are just an accounting trick that appeals to investor psyche,” said Nick Codola, senior portfolio manager at Orion Advisor Solutions in Omaha, Neb.

Kent Thune, research lead at etf.com, is also not biting on the stock split as a reason to join the Nvidia party.

“This is not a popular view now, but I wouldn't be surprised if the Nvidia split marked a price top, at least for several weeks,” he said.

Citing the recent string of positive Nvidia news, Thune said the company “may not have another surprise up its sleeve to keep up the elevated expectations and stock price momentum for quite some time.”

That introduces the nasty flipside of sitting tight in a leveraged ETFs designed for day traders.

Consider, for example, the abrupt 20% pullback by Nvidia stock from March 25 through April 19. That pullback ballooned to a 38% drop by the double-leveraged NVDL fund over the same period.

“If someone bought in during that time, they’re not very happy,” said Ed Egilinsky, managing director at New York-based Direxion.

“It’s the power of compounding when the trend is your friend, but you gotta monitor these things day to day,” he added. “It’s fool’s gold to hold these indefinitely unless you believe the trend will continue.”

Jeff Benjamin is the wealth management editor at etf.com, responsible for coverage related to the financial planning industry. This includes writing, hosting podcasts, webinars, video interviews and presenting at in-person events.

Jeff is a veteran journalist with more than 30 years’ experience covering the financial markets. He has won more than two dozen national and regional awards for his reporting. He most recently worked as a senior columnist at InvestmentNews where he wrote about investment products and strategies, as well as the broader financial planning industry. Prior to that, Jeff worked as an analyst at Cerulli Associates where he researched and wrote reports on the alternative investments industry. Jeff also worked as a money management reporter at Dow Jones Newswires, where he covered the mutual fund industry.

Based in North Carolina, Jeff is a former Marine and has a bachelor’s degree in journalism from Central Michigan University.