There's an ETF for that? The Top 3 ETFs to Bet On (Or Against) Nvidia

Nvidia Option Income Strategy (Covered Call)

One of the most polarizing ETFs for Nvidia exposure is the YieldMax NVDA Option Income Strategy ETF

. As of July 3rd, it boasts a staggering 105% distribution rate, which is calculated by annualizing the ETF's recent monthly distribution and dividing it by its most recent net asset value (NAV).

This impressive yield isn't a typo, but a feature of the ETF's unique synthetic covered call strategy. Essentially, instead of holding Nvidia stock directly, NVDY employs a short put and a long call to create what's known as a synthetic stock position. This is capital efficient and provides long exposure to Nvidia without needing to actually own the stock.

To generate income, NVDY sells a short call, effectively creating a covered call strategy. The collateral for these options positions is typically backed by treasuries.

The expected risk and return trade-off here is significant. The high volatility of Nvidia leads to above-average premiums from the options, driving the high distribution rate.

However, this comes with capped upside and full downside risk of the reference asset. It's a high-risk, high-reward strategy with no free lunch, as investors must be prepared to accept the potential for significant losses if Nvidia's stock price drops.

Leveraged long Nvidia exposure

Leveraged ETFs have been around for quite some time, thanks to providers like ProShares and Direxion. However, it wasn't until 2022 that their single-stock counterparts began to gain traction.

The reason for this surge in popularity is simple: traders demanded an easy, liquid tool for magnified intraday exposure without the need for margin accounts or complex options strategies. These single stock leveraged ETFs offer a straightforward way to amplify returns.

Personally, I find these ETFs particularly useful as trading tools. They make it easy to size your position—just figure out how many shares to buy—and your risk is limited to what you put in, as you can only lose the amount you invested.

A popular example in this category is the GraniteShares 2x Long NVDA Daily ETF

. As the name suggests, this ETF aims to magnify Nvidia's price return by 2x within a single trading day.

However, there are some downsides to consider. The usual volatility drag associated with holding leveraged ETFs for the long term is a significant factor.

This drag occurs because the leverage is reset daily, leading to potential compounding losses and divergence from the reference asset over time if the market is volatile. Additionally, NVDL carries a high gross expense ratio of 1.57%, which is waived down to 1.15% net until December 31, 2024.

Short Nvidia exposure

Shorting a highly successful company like Nvidia is a risky proposition, especially given the challenges involved: high borrowing costs, potential margin calls, volatility crush and the theta decay on put options.

However, with an inverse single-stock ETF like the Direxion Daily NVDA Bear 1X Shares

, shorting Nvidia becomes as simple as buying and holding shares.

This ETF aims to deliver a daily return that is the inverse of Nvidia's price return, meaning it seeks to provide a -1x performance of Nvidia each day.

Like many leveraged ETFs, this is achieved through the use of swaps. Swaps are financial derivatives where two parties exchange cash flows or other financial instruments over time. In the case of NVDD, swaps are used to gain inverse exposure to Nvidia's stock performance.

However, it's important to be aware of the usual pitfalls associated with leveraged ETFs, including the potential for significant decay over time.

This decay can be worse when betting against a profitable company like Nvidia, making long-term holding of such an ETF inadvisable. Additionally, NVDD comes with a high gross expense ratio of 2.01%, which is waived down to 1.01%.

Please note this article is for information purposes only and does not in any way constitute investment advice. It is essential that you seek advice from a registered financial professional prior to making any investment decision.