Nvidia, Tesla and Apple Stock Leveraged ETFs: Here’s Everything You Always Wanted to Know But Were Too Afraid to Ask

As legendary investor Warren Buffett has said more than once, “If you’re smart, you don’t need leverage.”

So Buffett is not a fan of leverage. Easy for him to say, right? His net worth is over $100 billion. What about those of us who don’t have a few billion dollars in cash in the bank? What’s the harm in a little leverage?

Well, it’s time to examine some single-name exchange-traded funds (ETFs) to see how they perform and whether they’re right for the average investor. Let’s get started.

Image source: Getty Images.

What are leveraged ETFs anyway?

Let’s start from the beginning: leveraged exchange-traded funds are investment products that use derivatives (stock options) to create returns that amplify the price movements of underlying securities.

So a leveraged ETF couldfor example, seeks to provide twice the daily return in a stock index such as that S&P 500.

However, in the case of GraniteShares ETFs, the funds seek to amplify the daily returns of a single stock. The company offers funds for more high-profile actions, incl Apple, AMD, Amazon, Alibaba, Coinbase Global, Meta platform, Nvidiaand adze.

Some of the company’s funds are long; some are short. Long funds seek to double the positive daily return of a particular stock. So, for example, of the company GraniteShares 2x Long NVDA Daily ETF (NVD -2.91%) aims to double the percentage return on Nvidia stock — if Nvidia stock rises 2% in a day, background purposes to generate a 4% return on the same day.

Short funds work the same way mode, but reversed. For example, the GraniteShares 2x Short NVDA Daily ETF seek to double negative nvidia stock daily return. In this case, if Nvidia stock fell by 2%, background should generate a positive return of 4%. Similarly, a 2% gain in Nvidia stock should generate a 4% loss for the ETF.

Why leveraged ETFs aren’t for the long-term investor

Now, at first glance, leveraged ETFs I might seems like a great one idea for the long-term investor. After all, if one is optimistic, let’s say Nvidiawhy not be twice as optimistic?

However, like many things in life, it’s more complicated than that.

Leveraged ETFs they are not designed for long-term investing — and you don’t have to take my word for it. Here is the investment objective of the GraniteShares 2x Short NVDA Daily ETF from the GraniteShares website:

“The fund seeks daily investment results, before fees and expenses, of -2 times (-200%) the daily percentage change in NVIDIA common stock. Body

There is no guarantee that the Fund will achieve its stated objective.

The fund should not be expected to deliver -2x NVDA’s cumulative return for periods longer than one day.”

From the outset, two things should be clear:

1. The background does not guarantee that its performance will correspond to the stated purpose.
2. The background is not designed to generate leveraged returns for any period more than a day.

Both caveats matter enormously to the long-term investor. First, an initial acknowledgment that a fund might not meet its stated objective should give investors pause. Second, noting that background it shouldn’t be expected to provide returns for more than one day, fund managers they are revealing to whom this type of product is addressed — short term traders.

On top of that, the background charge a huge fee. The expense report for The GraniteShares 2x Short NVDA Daily ETF is a spectacular 1.74%. That means an investor putting $10,000 into background will pay $174 in annual fees. For context, Vanguard S&P 500 ETF — one of my favorite ETFs — has an expense ratio of just 0.03%, meaning an investor pays just $3 a year in fees for every $10,000 invested.

In short, maybe Buffett was on to something after all. The lever often comes with strings attached. For the vast majority of investors, it’s best to keep things simple. A standard index fund that charges a low expense ratio is a much better alternative to a leveraged single-stock ETF.