Star stocks soar! Invest in stocks or leveraged ETFs for two times?

Closed from early 2024 to November 1, 2024, $英偉達 (NVDA.US)$ The cumulative increase in positive shares was 173.50%. Meanwhile, NVDL, the largest asset-sized single-stock ETF that tracks Nvidia's share price, gained 371.29% cumulatively.

Other stocks with higher price volatility, such as Tesla ($Tesla (TSLA.US)$)、Coinbase ($Coinbase (COIN.US)$), USA Microprocessor ($Advanced Micro Devices (AMD.US)$) Single stock ETFs, etc., have become the “new pet” that investors chase. As of March 2024, the 10 largest single stock ETF assets all exceeded $0.1 billion, according to data from Morning Star.

Although the gains look very attractive, is this ETF really right for you? If you are preparing to trade such ETFs, it is recommended that you spend 5 minutes reading below to understand the risks and precautions of trading before making your decision.

How does a single stock ETF work?

The single-stock ETF is only officially listed on the U.S. market in 2022 and is a “newcomer” in the entire ETF family, but unique. Other ETFs track a basket of stocks, bonds, commodities, and more, but they focus on tracking the performance of a listed company's share price, even leveraging or doing nothing through derivatives.

As of March 2024, there are nearly 60 single-stock ETFs on the U.S. stock market, according to data from Morning Star. We can roughly divide them into two broad categories: Leveraged and Reverse ETFs, and Covered Call ETFs, so that we can better understand how they work and thus know how to choose.

Category 1: Leveraged and Reverse ETFs

Most leveraged single stock ETFs currently have a leverage multiplier of 1.25x, 1.5x, or 2x, which means buying these ETFs can serve the purpose of maximizing potential gains and risks and doing nothing, even if you're not using the financing feature.

NVDL mentioned earlier ($GraniteShares 2x Long NVDA Daily ETF (NVDL.US)$), which is an ETF that tracks the performance of the Oneida one-day share price with a target of 2x leverage. When the price of Indigo shares rose 1%, NVDL would rise by 2% on the day, and by 2% on the contrary.

Thanks to the rise of Nvidia, the ETF has reached $5.552 billion in assets (as of November 1, 2024) and is one of the most actively traded ETFs of its kind.

Reverse single stock ETFs have two choices of leveraged and unleveraged ones, relative to their trading volume and asset size that are incomparably more leveraged ETFs. For example, an NVD that tracks the NVDA share price is launched by the same issuer as NVDL ($GraniteShares 2x Short NVDA Daily ETF (NVD.US)$), is a reverse single stock ETF with 2x leverage. NVD rises 2% on the day when the price of the shares falls by 1%, and the reverse falls by 2%.

Interestingly, NVD's asset size is only $86.6718 million (as of November 1, 2024), far from twice the NVDL, but its trading volume increases with each time the price of NVIDIA shares fluctuates.

What are the ways in which these ETFs achieve leverage and reverse effects? We looked at their holdings and we knew. If you wishTrade this ETF with Futubull, search for the ETF name, select “Fund” in the navigation bar above, and we can see the “Position Details” of this ETF.

For example, in the figure below, we can tell that this ETF is primarily leveraged by borrowing funds and trading swap contracts.

Trading Risks and Cautions

We used to beETF Guide from Beginner to Real-LifeThe course introduces you to the risks of leveraged and inverted ETFs in detail, so the following is a simple case study. If you want to get a comprehensive understanding of ETF basics, you can always learn this course for free.

1. If you look in the wrong direction, a leveraged ETF also magnifies potential losses

A LEVERAGED ETF MAGNIFIES POTENTIAL GAINS WHILE ALSO MAGNIFYING POTENTIAL LOSSES.

For example, Tesla suffered a cumulative decline of 29.66% from January 2024 to June 4, 2024. and TSLL ($Direxion Daily TSLA Bull 2X Shares (TSLL.US)$), an ETF that tracks Tesla's share price twice as leveraged, fell 48.17% cumulatively. Did you see it? Leveraged ETFs also mercilessly magnify losses when stocks don't go in the expected direction. This requires investors who buy it to have a certain ability to analyze the stock, as well as the power to recognize the wrong stop loss.

2. Leveraged and Reverse ETFs May Underperform When a Positive Stock Crosses

Both leveraged and reverse ETFs are based on the one-day performance of the stock price. In summary, such ETFs perform well in the single market, but do not perform as expected when the share price is uncertain or fluctuating up or down.

For example Coinbase ($Coinbase (COIN.US)$). From January 2 to March 11, 2024, Coinbase's share price also rose 46.14%, tracking its 2x leveraged ETF CONL ($GraniteShares 2x Long COIN Daily ETF (CONL.US)$), further increasing to 116.8%. But since then, Bitcoin has slowed down, and Coinbase's share price has entered a crossbar period, during which we can observe that CONL has experienced a larger pullback than the majors during a period of significant price volatility. From March 25 to June 4, Coinbase fell 6.79%, while CONL fell 21.59%, equivalent to three times the decline of the mainstream stock.

3. Leveraged and inverted ETFs are not suitable for long-term holding

Taken together, leveraged and inverted ETFs are better suited to capture short-term unilateral trading opportunities, which are relatively more risky for long-term holders. (Unless the relevant asset can maintain a long-term uptrend)

Some may notice the surprisingly high yield rates shown by individual single stock ETFs, but note that this figure is variable and may not be able to sustain high yield rates over the long term. Traditionally, investing in high-dividend non-leveraged ETFs may be more stable if you're aiming for a stable dividend.

4. Withdrawal Risk

If an ETF trades poorly and underperforms well, there may be a risk of a market sell-off.

Likewise, with leverage, choose a single stock ETF or finance trading a mainstream stock?

For ordinary investors, the advantages of trading a single stock ETF are mainly as follows:

Taken together, the potential risks of financing trading stocks and trading a single stock ETF are relatively high. But relatively speaking, the speculative properties of a single stock ETF are higher.

IF YOU WANT TO CAPTURE SHORT-TERM INVESTMENT OPPORTUNITIES IN STAR STOCKS WITH A SMALL AMOUNT OF MONEY, OR DON'T WANT TO PAY FINANCING INTEREST OR COLLATERALISE CASH OR STOCKS, THEN A SINGLE STOCK ETF MAY BE MORE APPROPRIATE.

But if you take a very good look at a stock and want to hold it for the long term, then it is naturally better to trade a stock directly. Financially trade stocks, although the leverage multiplier can be higher, it is important to note that the longer you hold, the more interest will accrue.

Category 2: Single Stock Covered Call ETF

In addition to leveraged and reverse ETFs, there are Covered Call ETFs that operate around a single stock.

Anyone familiar with options should know the classic options portfolio strategy Covered Call? Simply put, the Covered Call consists of buying positive shares+selling bullish options of the corresponding amount. THIS STRATEGY CAN HELP HEDGE THE RISK OF SHORT-TERM FALLS IN STOCK PRICES, PROVIDED YOU LOOK AT THE LONG-TERM PERFORMANCE OF STOCKS. The advantage of this strategy is that when the stock price falls or crosses, one option money can be obtained by selling bullish options. On the other hand, if the price of a positive stock rises, it is necessary to close the position in time or sell the stock at the exercise price. This equates to sacrificing some of the upside space in exchange for limited loss risk.

As the name implies, the Covered Call strategy used in managed funds is the Covered Call ETF.

The Covered Call ETF is actually early in the making, but is mostly used to hedge stock indices or a basket of assets, such as the QYLD, which was once a hot time when the US stock market fell, fluctuating on the Nasdaq 100 Index ($Global X Nasdaq 100 Covered Call ETF (QYLD.US)$). But the Covered Call ETF around a single stock is younger than a leveraged and inverse single stock ETF, so most of the trading volume and asset size are also somewhat lower.

With this type of ETF, a similar conflict effect can be achieved even if you do not trade options, and it is more convenient. Moreover, most of these options pay monthly, depending on the performance of the ETF in the previous month, and the high yield rates also attract many investors.

A regular Covered Call is for holders of shares, and most Covered Call ETFs that track a basket of assets or stock indexes also hold positive shares. But many single-stock Covered Call ETFs do not hold a positive stock, but hold a large number of low-risk fixed income assets such as Treasury or Treasury bills; their options for holding positions are not exclusively bullish options, but there are bearish options. For example, in the following two ETFs, you can see from the position details which options and the number of positions held are allocated separately. From the name of the option, we can tell the position price, expiration date and direction of the option.

But due to the limitations of strategy, most single-stock Covered Call ETFs do not have gains on individual stocks, such as Indira and NVDY ($YIELDMAX NVDA OPTION INCOME STRATEGY ETF (NVDY.US)$).

Trading Risks and Cautions

The Covered Call ETF for a single stock, in comparison, is also a high-risk ETF. For the average investor, there are two main risks to be aware of.

1. Covered Call strategy may not hedge all risks

These ETFs either generate losses or fail to pay dividends as expected when the profit portion used as a hedge in the Covered Call strategy cannot fully offset all downside risks when the market falls sharply. In addition, such ETFs may also face the risk of suspending trading or being sold off.

2. Dividend Situation Depends on ETF Yield Performance

Options themselves are relatively complex tools, and not every ETF's options strategy works, so different Covered Call ETFs perform differently, with most performing poorly as stocks, but some may even outperform stocks depending on the fund manager's investment level.

For example, two single stock Covered Call ETFs launched by the same issuer (which tracks Coinbase's CONY, respectively$YIELDMAX COIN OPTION INCOME STRATEGY ETF (CONY.US)$, and track Paypal's PYPY$YIELDMAX PYPL OPTION INCOME STRATEGY ETF (PYPY.US)$), the performance is very different:

Combining these two scenarios, we can see that a single-stock Covered Call ETF may perform better than a stock when a stock's price fluctuates irregularly or even shockingly falls, but the overall direction remains consistent with a positive stock.

List of Popular Stocks and Related Single Stock ETFs

We have selected 10 of the most popular companies of interest to ordinary investors and, based on a variety of types, have selected individual stock ETFs with a representative asset size of more than US$50 Million (registered as of November 1, 2024). (Due to the current reverse single stock ETF asset model size, there is no indication here in the list. If there is interest from the public, you can search the key phrase “stock code” or “stock code” in Futubull “+“ short”.)