(Bloomberg) -- Day traders spent last year shoving billions of dollars into leveraged Nvidia Corp. ETFs in a bid to amp up their gains on the hottest stock on the planet. Now those wagers are in peril.
Get-rich-quick funds that offer to amp up returns in Nvidia started the week with a record rout, after China’s DeepSeek sparked a selloff in technology stocks. As the chipmaker sank, a trio of Nvidia-focused funds — led by the GraniteShares 2x Long NVDA Daily ETF (ticker NVDL) — collectively incinerated about $2 billion in value, the data show. Leveraged ETFs as a whole were hit by a $10 billion loss in Monday trading, according to an analysis by Athanasios Psarofagis at Bloomberg Intelligence.
Egged on by expectations that the era of US tech innovation will go unchallenged, momentum-chasing day traders have pounced on leverage in the ETF world and now risk confronting their biggest test of the bull market cycle, if the DeepSeek hype is vindicated.
Leveraged ETFs are also making their presence felt across the broader equity marketplace as their assets hit records. Nomura Holdings Inc. projects that such products — concentrated in the semiconductor and megacap tech industries — will sell about $22 billion on Monday in order to rebalance their holdings.
The market meltdown is rocking speculative trades untied to the AI theme, including the cryptocurrency complex, exposing how Wall Street euphoria has pumped up risky assets of all stripes.
While inverse-Nvidia ETFs also exist, the majority of flows have in recent years gone toward their bullish counterparts. NVDL has grown to become one of the largest leveraged-up ETFs, boasting about $5 billion in assets, up from $200 million at the start of 2024.
“It absolutely shows the perils of going all in on one bet,” said Matt Maley, chief market strategist at Miller Tabak + Co. “More importantly, is shows how dangerous it can be to use leverage on those kind of bets. This is the type of thing that could create some forced selling at some point going forward.”
Traders had collectively added about $4 billion to the three Nvidia-focused funds last year — which also include the Direxion Daily NVDA Bull 2X Shares (NVDU) and the T-Rex 2X Long NVIDIA Daily Target ETF (NVDX) — as they chased the surge in shares of the chipmaker, which soared 345% in that span to at one point become the most valuable company in the world.
On Monday, the GraniteShares ETF fell a record 35% on Monday morning, as did the Direxion Daily NVDA Bull 2X Shares and the T-Rex 2X Long NVIDIA Daily Target ETF.
Bullishness on Nvidia’s ability to power the AI revolution had helped fuel a run-up in the stock market in recent years, with investors betting that the new technology could streamline many business processes, among other things. It also helped power a boom in other areas of so-called disruptive innovation, with companies and asset classes even tangentially related to AI — including quantum computing and cryptocurrencies — benefiting from a deluge of investor cash.
But the sudden crop-up of DeepSeek’s AI model — which over the weekend rose to the top of Apple’s app-store charts — had analysts saying that it presented a valid contender to models like OpenAI and others, which are costlier to run. The tech-heavy Nasdaq 100 slid nearly 4% at one point, its worst day in more than a month. A number of sectors and industries were caught up in the selloff, with tech losing more than 4%.
A levered semiconductors ETF that trades under the ticker SOXL lost 22% at one point, the most since September, and a number of cryptocurrency-based funds, including those focused on Bitcoin or Ether, were among the biggest losers among all ETFs, data compiled by Bloomberg show.
“Most leveraged ETFs amplify daily price returns — and whether Nvidia still has room for growth or not, it will have unpredictable daily price swings,” said Roxanna Islam, head of sector and industry research at TMX VettaFi. “Daily price movements are often skewed by unpredictable external factors (like today’s news with DeepSeek) and don’t always follow fundamentals, so putting large amounts of cash into leveraged ETFs can be very risky for traders.”
There are signs that some investors were cautious with their AI investments to start the year, with the leveraged Nvidia ETFs NVDL, NVDX and NVDU seeing outflows totaling more than $1 billion, even amid a gain of 6% for Nvidia shares through Friday. The majority of that sum came from NVDL, from which traders yanked roughly $960 million year to date, the second-largest outflow amid all leveraged ETFs tracked by Bloomberg.
Meanwhile, funds that aim for the inverse of Nvidia’s performance benefited on Monday. The T-Rex 2X Inverse NVIDIA Daily Target ETF (NVDQ) and the GraniteShares 2x Short NVDA Daily ETF (NVD) each rose 36% in their best-ever performances for a single session.
“The AI industry is still in a relatively nascent stage, and while long-term prospects generally still look good, valuations, investor sentiment, and global competition have contributed to uncertainty behind Nvidia, Magnificent 7 names, and other domestic tech stocks,” added TMX VettaFi’s Islam. “While I don’t think there will be a significant long-term shift in the market, it is an important lesson to remember that these stocks aren’t indestructible.”
--With assistance from Sam Potter.
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