Shares of the GraniteShares 2x Long NVDA Daily ETF (NVDL 3.14%) fund crashed hard in January 2025. The leveraged exchange-traded fund (ETF) fell 26.1% last month, according to data from S&P Global Market Intelligence. This crash highlighted the risks of holding leveraged ETFs, whose downturns can be amplified even harder than the positive returns in better times.
Riding the Nvidia rollercoaster
As the fund name implies, this GraniteShares ETF strives to double the returns of Nvidia (NVDA 1.53%) stock. It's a substantial fund with $4.8 billion of assets under management, and it is very good at delivering the expected results.
Nvidia's stock has delivered a 591% return since the GraniteShares ETF's inception in December 2022. The ETF very nearly doubled that result, with minor shifts based on its beefy annual management fees of 1.15% plus small day-to-day deviations. It's hard to achieve absolute precision in leveraged financial instruments, even when equipped with the unique battery of value-moving tools that are available only to ETF managers.
The same imperfections are still there when the underlying stock goes down instead of up. As a result, the GraniteShares fund more than doubled Nvidia's market pain last month. You probably already know that Nvidia took a tumble when a Chinese competitor showed a high-powered large language model (LLM) that was built with a computing budget measured in millions of hardware dollars, not billions.
Leveraged ETFs are a risky business
The DeepSeek introduction underscored the risky nature of owning richly valued stocks like Nvidia. Nobody is immune to competition, and DeepSeek's innovative approach to artificial intelligence (AI) could inspire a plethora of similar operations. Nvidia bears will argue that this would undermine the broader market's need for lots of Nvidia chips, while bulls can point out that the DeepSeek approach could result in even more powerful AI systems when paired with large hardware budgets.
It also shone a spotlight on the extra-high risks of betting on leveraged ETFs. These financial instruments were really designed with short-term trading in mind, and many speculators wouldn't hold these funds overnight. Stretch the holding period to weeks, months, or even years, and you'll see fewer and fewer traders holding on to their risky shares. The upside can be sweet in good times, but what if the downturn develops into a long-term plunge?
For instance, the iShares US Regional Banks (IAT 1.78%) index fund took a deep dip in the inflation crisis two years ago. It's only back where it started in February 2023. The leveraged Direxion Daily Regional Banks Bull 3x (DPST 2.21%) fund is down 55% over the same period.
So you might be tempted to hold leveraged ETFs for the long haul, and the temptation is even sweeter when the fund is tied to a high-octane growth stock or a booming market index. Just remember that the downside can be more bitter than the upside was sweet. Be careful with these tricky funds. In January, leveraged Nvidia funds showed you why.
