This single-stock ETF with Nvidia exposure is up by 128% on a YTD basis

What are leveraged ETFs?

With leveraged ETFs, the idea is to seek higher returns than the actual ones delivered by the underlying shares. The leverage factor will be decided by how much you can outperform the underlying security. For example, if the leverage factor is 2 times (+200 percent) and if Nvidia shares gain by 1 percent, the ETF can be expected to gain by 2 percent on that particular trading session. If the leverage factor is 1.25 times (+125 percent) and if Nvidia shares gain by 1 percent, the NAV of the ETF can be expected to gain by 1.25 percent.

Since these ETFs are highly dynamic and actively traded, the expense ratio is on the higher side.

Single-stock ETFs

A single-stock ETF permits you to leverage a single company, and potentially earn significantly higher returns, at times in multiples, depending upon the leverage factor. Single-stock ETFs are not meant for long-term investors. It is more suitable for short-term traders. Single-stock ETFs are leveraged ETFs.

For more on semiconductor ETFs

What is suitable for whom?

Sophisticated investors who understand leverage and can actively monitor the portfolio will find investing in leveraged ETFs interesting. Swing traders looking for short-term positional strategies, ranging from 2 days to 5 days to a month, defined by the technical range, can find leveraged ETFs very useful.

For any event-driven strategy, leveraged ETFs can be an extremely profitable financial instrument. Leveraged ETFs, focusing on single stocks can become extremely handy for momentum investors as the leverage can help tilt the portfolio by giving overweight to the stock that is showing maximum promise.

If you believe the index returns can be driven by a small number of stocks, leveraged ETFs can help you position yourself to outperform the index ETF.

When Nvidia shares jumped by ~ 16 percent on February 22 trading session, Nvidia shares alone were seen contributing almost 33 percent to the S&P 500 gains, with its weightage in the diversified index being at 4.24. Just 10 shares were driving ~61 percent of the day’s move for the S & P 500 when the S & P 500 made record highs for itself along with Nvidia shares.

Basically, active portfolio management is made easy with such financial instruments.

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