Global Investors Clamor for More Ways to Play Tech With the Risky Trend in ETFs

In 2024, the exchange-traded fund (ETF) market experienced record inflows, fueled by the growing “retailization” of trading. While traditional index funds still attract the majority of investments, a new wave of retail traders is gravitating toward actively trading volatile tech stocks, often embracing higher fees and risks for the potential rewards.

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Retail investors globally are increasingly turning to ETFs as a way to access the tech stocks they favor, such as Nvidia, Tesla, Palantir, Coinbase, and MicroStrategy. These traders not only seek exposure to volatility but are also keen to amplify their returns using leverage. The U.S. ETF market has responded by offering products tailored to this demand, providing leveraged exposure to high-profile tech stocks.

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Since the U.S. Securities and Exchange Commission (SEC) approved the first single-stock ETFs in July 2022, this category has grown exponentially. As of now, there are 60 single-stock ETFs in the U.S., managing a combined $18 billion in assets. These ETFs typically provide two-times leverage on popular tech stocks, doubling daily returns or losses. For instance, if Nvidia’s stock price increases by 1% in a day, the corresponding ETF would deliver a 2% return.

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Leaders in Single-Stock ETFs

Some of the largest single-stock ETFs include:

• GraniteShares 2x Long NVDA Daily (NVDL): $5.9 billion
• Direxion Daily TSLA Bull 2x Shares (TSLL): $4.4 billion
• T-Rex 2x Long MSTR Daily Target (MSTU): $1.3 billion
• GraniteShares 2x Long COIN (CONL): $1.0 billion
• Defiance Daily Target 2x Long MSTR (MSTX): $987 million

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These ETFs often have inverse counterparts, enabling traders to profit from declines in stock prices. However, inverse ETFs typically attract less capital compared to their long counterparts. For example, while GraniteShares’ 2x Long NVDA ETF (NVDL) manages $5.9 billion, its 2x Short NVDA ETF holds just $57 million.

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Trading volumes for single-stock ETFs have surged. On January 3, 2024, total trading volume in these products reached $500 million. A year later, that figure skyrocketed to $7.3 billion, underscoring the immense interest from short-term traders. Most users of these ETFs are not concerned with fees, which typically hover around 1%, or the daily resetting of leveraged returns. Instead, they focus on capturing short-term price movements, often trading these instruments daily.

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The appeal of single-stock ETFs extends far beyond the U.S. Will Rhind, CEO of GraniteShares, noted that demand is increasingly coming from international investors in countries like South Korea, Japan, and emerging markets such as Malaysia. These markets often lack vibrant local tech sectors, making U.S. tech stocks an attractive investment avenue. Rhind observed that many younger investors in these regions view U.S. tech stocks as a primary wealth-building opportunity, given the lackluster performance of local markets and limited access to real estate.

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Institutional ownership in single-stock ETFs remains limited, emphasizing the retail-driven nature of these products. For example, institutional investors own just 11.36% of GraniteShares’ Long NVDA Daily ETF (NVDL) and only 3.57% of Direxion’s NVDA Bull 2x Shares (NVDU). The high turnover rates of these ETFs—often exceeding 30% daily—further highlight their popularity among short-term retail traders.

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The rise of 24-hour trading is another trend that complements the growth of single-stock ETFs. The SEC recently approved the 24X National Exchange, which plans to operate nearly round-the-clock trading. Similarly, the NYSE has announced plans to extend trading hours to 22 hours a day. This move caters to both international investors and U.S. retail traders who prefer to trade outside regular market hours.

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Another innovation in the ETF space is the emergence of covered-call strategies. These ETFs generate income by selling options on the underlying stock. For example, the YieldMax NVDA Option Income Strategy (NVDY) combines long positions in Nvidia with covered-call selling to provide income while capping upside potential. GraniteShares recently introduced a similar product, the YieldBoost Tesla ETF (TSYY), which employs put-selling strategies.

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The rapid growth of single-stock ETFs reflects the willingness of younger, risk-tolerant investors to embrace leveraged trading and momentum-driven strategies. Todd Sohn, head of ETFs at Strategas, likens this approach to venture capital, where traders place small, high-risk bets on individual stocks in pursuit of outsized gains. He attributes much of this trend to the global dominance of U.S. tech markets, which now account for nearly 70% of global stock market capitalization.

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While single-stock ETFs are effective tools for short-term trading, experts like Morningstar’s Ryan Jackson caution that they are not suitable for long-term investors. Jackson highlights their high costs, complexity, and potential for losses, warning that they “are liable to take more from investors than they give.”

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Despite these concerns, the industry shows no signs of slowing down. As Sohn predicts, the focus will likely shift to identifying the next wave of volatile retail favorites, potentially including emerging tech names like Palantir or companies in the quantum computing space. Until momentum reverses, single-stock ETFs are poised to remain a dynamic force in the evolving world of retail investing.

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