On Monday, Nvidia experienced a staggering loss of almost $600 billion in market capitalization, marking the largest single-day drop for any company in U.S. history. This dramatic sell-off was fueled by rising concerns over China's AI lab DeepSeek, whose advancements in artificial intelligence are challenging America's leadership in the sector. The financial tremor affected various single-stock exchange-traded funds (ETFs) linked to Nvidia, emphasizing the inherent risks involved in betting on such volatile instruments.
The funds affected were primarily designed to deliver double the performance of Nvidia on a single-day basis. The T-Rex 2X Long Nvidia Daily Target ETF (NVDX) and Direxion Daily NVDA Bull 2x Shares ETF (NVDU) both plunged by approximately 33.77% and 33.8% respectively. Meanwhile, the GraniteShares 2x Long NVDA Daily ETF (NVDL) saw its assets under management decline from a peak of $4.3 billion to $2.4 billion, suffering a similar overnight fall of 33.78%. Conversely, funds betting against Nvidia, like the GraniteShares 2x Short NVDA Daily ETF (NVDL), rose more than 33%, illustrating the unpredictable nature of these financial instruments.
Single-stock ETFs, since their approval in 2022, have gained popularity with over 60 products now available in the U.S., amassing $18 billion in assets. These ETFs cater to traders looking to capitalize on market volatility by expressing strong bullish or bearish views over short periods. However, as Morningstar highlights, these instruments are inherently more volatile and may not suit all investors.
"While these ETFs can magnify gains, they can also magnify losses and may not be appropriate for investors without a high risk tolerance," said Roxanna Islam, head of sector and industry research at TMX VettaFi.
DeepSeek's rapid advancements have intensified market competition. Its open-source reasoning model, R1, outperformed OpenAI's latest o1 model in several third-party tests, achieving this feat within two months and on a budget of less than $6 million. Such developments have raised questions about America's continued dominance in AI technology.
"While they're powerful tools for tactical day traders, they may not suit buy-and-hold long-term investors," stated Jocum.
As Nvidia's market cap plummeted, ETFs linked to the tech giant reported their largest single-day losses according to FactSet data. This event serves as a cautionary tale for investors who may overlook the potential for significant losses when engaging with these high-risk financial products.
"It could be a matter of time before some of them implode depending on the intensity of market movements of individual stocks," commented Marc Jocum, product and investment strategist at Global X ETFs.