Leveraged ETFs become a "double-edged sword" for short-term traders, NVIDIA's market value evaporates by 400 billion, causing huge losses for retail investors

Zhitong Finance APP noticed that for short-term traders who use artificial intelligence to drive stock frenzy, leveraged ETFs are a profitable bet, providing double-digit returns every week.

However, now, after pouring record funds into a leveraged ETF, a group of retail investors faces huge losses as NVIDIA (NVDA.US) market capitalization drops by about $400 billion.

The daily fluctuation of GraniteShares 2x Long NVDA Daily ETF (NVDL.US) is twice that of NVIDIA. Last week, as investors sought to expand the gains of this stock, known as the "most important stock" globally, the ETF saw a record inflow of $743 million. However, the timing proved to be inappropriate as the fund has dropped by about 25% since Tuesday's close. By 2024, the fund still rose by about 329%.

Dave Lutz, ETF director at Jones Trading, said, "Increasing the leverage position in NVIDIA is a high-risk, high-return practice - considering the stock has been driven by momentum and popularity, it is difficult to judge when the stock will eventually pull back." "Retail traders need to truly understand the structure of these products to fully understand the risks they bring."

Last week's untimely investment frenzy highlighted the performance risks of investing in such high-intensity ETFs, which use derivatives to enhance returns or reverse performance. Intraday traders favor inverse and leveraged ETFs as they are designed for short-term holding. However, their structure means they can bring huge profits as well as rapid losses.

This $3.7 billion ETF was launched in December 2022, attracted $189 million last year, and attracted about $1.8 billion in 2024.

As a representative of the artificial intelligence craze, NVIDIA's stock price has risen by 140% this year. This chip manufacturer has risen to become the second-largest weighting stock in the $70 billion Technology Select Sector SPDR Fund (XLK.US), accounting for over 20% of the tech ETF.

Meanwhile, investors bearish on NVIDIA have been crushed this year by the $93 million GraniteShares 2x Short NVDA Daily ETF (NVD.US), which tracks the daily inverse return of NVIDIA stock and has dropped by nearly 90% this year.

Currently, NVIDIA's astonishing growth is pausing. The stock entered correction territory on Monday, continuing the significant sell-off. After briefly claiming the title of the world's largest stock last week, the stock has fallen for three consecutive trading days by 13%, surpassing the 10% correction threshold TMX VettaFi's thematic strategy director Jane Edmondson said: "After a sharp rise, the timing for a pullback of NVDA and its artificial intelligence peers has matured." "Investors may take profits at the end of the quarter and readjust their portfolio allocations. However, the fundamental fundamentals still exist."