Understanding Leveraged Nvidia ETFs: NVDX vs. NVDL

Navigating the Volatile Waters of Leveraged ETF Investing

Comparing NVDX and NVDL: A Performance Overview

While both the T-Rex 2X Long NVIDIA Daily Target ETF (NVDX) and the GraniteShares 2x Long NVDA Daily ETF (NVDL) target twice the daily return of Nvidia, their actual performance has diverged. Over the last year, NVDL achieved a 63.96% return, outperforming NVDX's 55.07%, even as Nvidia itself gained 43.85%. This notable difference underscores that despite similar stated objectives, the real-world outcomes for these leveraged products can vary significantly.

The Mechanism of Daily Rebalancing: Impact on Long-Term Returns

Both NVDX and NVDL utilize total return swaps, resetting daily to provide a 2x leverage on Nvidia's daily stock movement. They are explicitly designed for short-term, single-session exposure, not to deliver double Nvidia's annual returns. This daily rebalancing, especially in fluctuating markets, can lead to a phenomenon known as 'volatility decay.' For instance, despite Nvidia gaining 10.15% year-to-date, NVDL only rose by 8.5% and NVDX by 5.9%. Conversely, a 6.38% dip in Nvidia resulted in a more substantial 14.85% loss for NVDL and a 15.08% loss for NVDX over the past month. This illustrates how doubling daily movements produces a distinct outcome from simply doubling a period's overall change.

Distinctive Features of Each Leveraged ETF

NVDL, launched in December 2022, was the first U.S. single-stock 2x Nvidia ETF. Its earlier entry has allowed it to build a larger asset base, fostering deeper liquidity and tighter trading spreads compared to NVDX. This scale benefits NVDL through a broader range of swap counterparties, more competitive swap pricing, and reduced implicit trading costs for frequent traders. NVDX, a newer offering from REX Shares and Tuttle, features a slightly lower published expense ratio. While this might appeal to certain investors, its smaller scale often translates to less liquidity. For investors making quick, single-session trades, the lower cost might be a factor, but for those engaging in multiple transactions weekly, NVDL's liquidity advantage typically outweighs NVDX's cost benefit.

Performance Discrepancies and Practical Implications

The past year clearly demonstrates the performance gap, with NVDL surpassing NVDX by approximately nine percentage points, despite both tracking the same underlying index. This divergence stems from path-dependent compounding, as well as differences in tracking efficiency and swap financing terms. For large-scale traders or those frequently adjusting positions throughout the day, NVDL's superior liquidity and more established operational history generally provide an advantage. NVDX might be more attractive to smaller investors who prefer a lower nominal share price and marginally lower expense ratios, provided they maintain very short holding periods. It is crucial to recognize that neither of these 2x leveraged single-stock ETFs is suitable for long-term portfolio holdings, as illustrated by the substantial drawdowns experienced even during moderate Nvidia declines. A shift in this dynamic would only occur if NVDX significantly improves its liquidity or if NVDL substantially increases its fees.