Trending
Exchange traded funds focused on a single stock may appear to run counter to the mission of diversification, but these novel products have a following.
Currently, there are dozens of single stock ETFs trading in the U.S. with a combined assets under management tally of nearly $13 billion. Peanuts relative to traditional equity ETFs, but not small potatoes, either. These ETFs have caught on, primarily with retail market participants, for a simple reason: they provide access to stocks with high price tags.
Looking at the offerings from some of the largest issuers of these funds, a massive percentage of the individual equity ETFs on the market today are linked to stocks with triple-digit price tags. There are some exceptions, but the bulk of these funds focus on expensive-by-price names.
With that in mind, there is a new sheriff in the town of single stock ETFs: Nvidia (NASDAQ: NVDA). Interestingly, Nvidia isn’t all that expensive by price. It closed at $139.56 on Oct. 23, but it has taken the crown from Tesla (NASDAQ: TSLA) as the stock with the most individual equity ETF assets tied to it.
How Nvidia Single Stock ETFs Got Here
With the benefit of 181.81% year-to-date gain, Nvidia is a $3.4 trillion company and the second-largest member of the S&P 500 behind only Apple (NASDAQ: AAPL). Data points like those coupled with artificial intelligence (AI) enthusiasm are generating interest in Nvidia single stock ETFs.
Data confirm that trend is palpable. As of the end of the third quarter, Nvidia single stock ETFs had taken in $4.4 billion since the start of 2024, bringing the eight funds’ combined assets under management tally to $7.3 billion, or more than half of the entire AUM found among all single stock ETFs.
“While the Tesla ETF has doubled its assets to $2 billion, the Nvidia ETF has multiplied its assets times 26, swelling to $5.7 billion,” notes Morningstar’s Gabe Alpert. “While price gains are part of the reason for the jump, flows are the primary driver. As of the end of September, the largest Nvidia single-stock fund pulled in over $3.3 billion in investor dollars, exceeding not only every other single-stock ETF but also every other leveraged and inverse stock ETF, including ones that track stock indexes.”
Shares of the chip giant are up 15.46% for the month ending Oct. 23, indicating that it’s possible the early fourth quarter has brought more inflows to Nvidia single stock ETFs.
Understanding Single Stock ETF
Whether it’s Nvidia, Tesla or another stock, understanding the uses for individual equity ETFs is crucial. Some professional market participants – mostly short-term traders –use these ETFs for arbitrage purposes.
After that group, there’s a broad audience of retail traders using these funds, some of whom might not be adequately illuminated to the risks. The risks are leverage and bearish bets. That is to say there are no single stock ETFs in the U.S. that follow the underlying stock step-for-step, minus the fund fee. There are only leveraged and inverse funds in this category.
A 1x leveraged ETF has some utility for active traders that want to hedge long positions and/or capitalize on potential pullbacks. However, leveraged ETFs can be problematic over lengthy holding periods. In a hypothetical example, let’s assume Nvidia finishes 2024 with a gain of 200%. An investor that bought a double-leveraged ETF on the stock on the first trading day of the year probably won’t be sitting on a 400% gain. Likely nowhere close to that because the gearing on leveraged ETFs is reset daily, which eats away at long-term returns. Buyer beware.
Related: An Income ETF Asserting Its Dominance in Active Management