Granite Shares introduced a leveraged ETF (Exchange-Traded Fund) in December 2022, specifically the GraniteShares 2x Long NVDA Daily ETF (NVDL), which was designed to provide double exposure to NVIDIA stock. In 2023, this leveraged ETF saw an astonishing 450% return, significantly outperforming the NVIDIA stock’s underlying returns of 196% during the same period.

（source：uSMART）

The Nvidia Leveraged ETF attracted inflows of more than $700 million last week. Unfortunately, since the close of the US stock market last Tuesday, Nvidia shares have fallen more than 11%, resulting in a 25% cumulative decline in the Nvidia Leveraged ETF, despite this, NVDL still maintains a gain of more than 340% this year. NVDL has fallen 13% over the past three trading days, wiping out about $400 billion in market value in just three days. The volatility of Nvidia's stock price, amplified by leverage, has an even greater impact on retail investors who invest in leveraged ETFs.

（source：uSMART）

Analysts believe Nvidia's fundamentals are still in place, with the stock falling because some investors tend to take profits at the end of the quarter. Jane Edmondson, head of thematic strategy at TMX VettaFi, told the media: "There is a real need for Nvidia and its AI peers to adjust after experiencing huge gains. Investors may take profits and realign their portfolio allocations at the end of the quarter. But the fundamentals that underpin these companies are still there."

What is a leveraged ETF?

An exchange-traded Fund (ETF) is a type of exchange-traded fund that is listed and Traded on a stock Exchange. An ETF is essentially a portfolio that tracks a specific index, commodity, bond, or other asset, in the form of a portfolio that matches the performance of the ETF to the underlying asset it tracks.

Leveraged ETFs amplify the performance of the ETF portfolio by adding leverage to the ETF. Compared with traditional ETFs, leveraged ETFs amplify their purchasing power through the use of derivatives or borrowed funds.

How do leveraged ETFs work?

The mechanism by which leveraged ETFs operate involves the use of financial derivatives, such as futures and options, as well as borrowing money to buy the underlying asset in order to leverage the underlying index or asset. This gives leveraged ETFs the potential for higher returns, as well as the potential for big losses. Leveraged ETFs use financial derivatives to amplify the underlying returns and can therefore be considered an application of financial derivatives.

To illustrate how leveraged ETFs work in more detail, consider a 2x performance leveraged ETF, known as NVDL, whose goal is to track 2x the daily performance of Nvidia's stock price change. Here's how the leveraged ETF works:

• Initial investment: Assume that an investor buys 100 shares of the double performance leveraged ETF on a given day at $100 per share for an initial total investment of $10,000.
• Underlying asset performance: Nvidia shares rose 1% during the trading day. Without leverage, an ordinary ETF would achieve a 1% gain, but the twofold performance leveraged ETF would achieve a double gain of 2% (however, due to the existence of financial derivatives, gains close to but less than 2% May occur, since the price of financial derivatives may not be fully linked to the underlying asset).
• Leverage: The ETF achieves 2x leverage by using financial derivatives, such as futures contracts, so that its price moves roughly twice as much as the Nasdaq index.
• Asset adjustment: At the end of each trading day, the leveraged ETF is rebalanced to ensure its target leverage ratio. In this example, the ETF might adjust its portfolio to keep the price of Nvidia stock up or down twice as much.

What are the advantages and disadvantages of leveraged ETFs compared to traditional ETFs?

For investors investing in leveraged ETFs has a number of caveats compared to traditional ETFs.

Since borrowing may be involved (to amplify purchasing power), the borrowing and financing costs of leveraged ETFs may affect their net worth, with greater impact the higher the leverage.

Leveraged ETFs amplify price movements, so the potential returns, as well as the potential risks, are higher. Investors need to exercise more careful risk management.

How to trade US Stock Leveraged ETFs on uSMART:

After logging in the uSMART SG APP, click on "US Stocks" from the top right of the page, click on "Hot ETF" in the "Quick Entry" column, click on "Long" or "short", or directly search for the US ETF code you want to know, you can enter the details page to understand the trading details and historical trend, click on "Trading" in the lower right corner. Select the "Buy/sell" function, and finally select the quantity and validity period to send the order; Image operation instructions are as follows: