Misguided Nvidia bet brought in $740 million before rout

(Bloomberg) — For day traders profiting from AI-fueled stock market mania, it’s been a lucrative bet like no other — delivering double-digit returns week after week.

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However, after investing a record amount of cash in a leveraged ETF, a cohort of retail investors is facing steep losses following Nvidia Corp.’s roughly $400 billion wipeout.

The GraniteShares 2x Long NVDA Daily ETF (ticker NVDL), which offers double the daily yield of the Jensen Huang-led company, saw a record inflow of $743 million last week as investors looked to amplify gains in what has been dubbed “the largest in the world”. stock.” The timing proved inopportune as the fund has fallen about 25% since Tuesday’s close. That’s still up about 329% in 2024.

“This is a very high risk, high reward trade that accumulates in leveraged NVDA positions – given that the stock has been driven by momentum and sentiment, so it is difficult to tell when the stock will ultimately retrace,” said ETF head Dave Lutz. at JonesTrading. “Retail traders really need to understand the structure of these products to fully understand the risk they carry.”

Last week’s ill-timed rush underscores the risk of feast-or-famine performance when it comes to investing in this high-octane breed of ETF, which uses derivatives to boost or reverse returns. performances. Inverse and leveraged ETFs are popular among day traders because they are designed to be held for short periods of time. But their structure means they can generate quick losses as well as big gains.

Launched in December 2022, the $3.7 billion ETF attracted about $1.8 billion in 2024, after attracting $189 million last year.

Nvidia, the poster child for the AI ​​craze, is up some 140% this year. The chipmaker became the second-largest weighting in the $70 billion SPDR Technology Select Sector Fund (XLK), comprising more than 20% of the tech ETF.

Meanwhile, Nvidia bears have been crushed this year by the $93 million GraniteShares 2x Short NVDA Daily ETF (NVD), which tracks the daily inverse return of the underlying stock and is down nearly by 90% this year.

For the moment, Nvidia’s spectacular growth is on hold. The stock entered correction territory on Monday as it extended a strong selloff. After briefly winning the title of the world’s leading stock last week, it fell 13% in three sessions, exceeding the 10% threshold which represents a correction.

“NVDA and its AI peers were ripe for a correction after their huge 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 readjust their portfolio allocations. But the underlying fundamentals are still in place.

–With the help of Lu Wang.

(Updates shares.)

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