2024 was a record year for ETF inflows amid the increasing “retailization” of trading. While the majority of inflows continue to go into plain vanilla index funds, there is an increasing “active” retail component that wants to trade volatile tech stocks despite the fees and risks. Retail traders worldwide are turning to ETFs to get access to what they want the most: volatile tech stocks. These investors not only seek volatility, they seek to trade it with leverage. The U.S. market, and particularly the ETF market, is giving them what they crave: access to tech stocks they know and love ( Nvidia , Palantir , Coinbase , Tesla , MicroStrategy , etc). Single-stock ETFs Since the SEC approved the first single-stock ETFs in the US in July 2022, the category has exploded. There are now 60 single stock ETFs trading in the U.S. with a combined assets under management tally of $18 billion. These single-stock ETF trade the most popular tech stocks in an ETF format, usually with two times leverage. This means that if, for example, Nvidia is up 1% in a single day, the ETF will return 2%. Largest single stock ETFs Symbol Assets under management Graniteshares 2x Long NVDA Daily NVDL $5.9 b Direxion Daily TSLA Bull 2x Shares TSLL $4.4 b. T-Rex 2x Long MSTR Daily Target MSTU $1.3 b. Graniteshares 2x Long COIN CONL $1.0 b. Defiance Daily Target 2x Long MSTR MSTX $987 m. In some cases, these ETFs are paired against inverse ETFs, again in many cases 2x inverse, meaning if Nvidia is down 1% on that day, the ETF is up 2%. Here’s an example of GraniteShares offerings. Notice the assets under management of these “short” ETFs is much smaller than the “long” version. Graniteshares ETFs Assets under management 2x Long NVDA Daily NVDL $5.9 b 2x Short NVDA Daily NVD $57 m. 2x Long TSLA Daily TSLR $185 m. 2x Short TSLA Daily TSDD $51 m. 2x Long COIN Daily CONL $1.0 b. 1x Short COIN Daily CONI $5 m. 2x Long AMD Daily AMDL $309 m 1x Short AMD Daily AMDS $4 m. One thing’s clear: trading volumes are exploding. “On January 3, 2024, volume in all single stock ETFs was $500 million. On January 2nd of this year, we did $7.3 billion,” Todd Sohn, head of ETFs for Strategas, told CNBC. Indeed, volumes in these single-stock leveraged ETFs exploded in the fourth quarter. Who is trading these ETFs? There’s two big issues: 1) they are expensive, usually with fees in the 1% range, and 2) because they are leveraged, they “reset” on a daily basis, so there is no way to judge what your return will be over periods longer than a single day. Neither of these issues have been an impediment to the growth of these assets. That’s because most of the people who own and trade these ETFs are short-term traders who turn over the assets on a near-daily basis and could care less about the fees or a daily reset. This is part of the increasing “retailization” of trading, the rise of self-directed investors, not just in the U.S. but globally, These people seek out the most volatile stocks and want want to trade them with leverage. And the client is increasingly international. “You have a generation of retail investors around the world that want access to U.S. tech stocks,” Will Rhind, founder and CEO of GraniteShares, the largest single stock ETF provider, told CNBC. “You have countries with huge populations that do not have a vibrant local market, and when they look to invest they look to the U.S., they look to Nvidia and Tesla and names they know,” he said, noting that much of the demand for his ETFs are coming from investors in South Korea, Japan, and even smaller emerging markets like Malaysia. Markets in their own countries do not seem attractive to these younger investors. “The Hong Kong [stocks], the Korea [stocks], haven’t performed that well,” he said. “China technology companies are becoming uninvestible, and there is little or no tech in Europe. A lot of young people don’t have access to real estate, so this is the only way to build wealth.” The largest holders of the GraniteShares Long NVDA Daily ETF (NVDL) include Aperiron Capital Ltd (based in Hong Kong), LMR Partners (a London-based global macro and event-driven investment strategies), and Oriental Harbor Investment Management (also based in Hong Kong). But the ownership stakes are small: the top 15 institutional holders own only 11.36% of the aseets under management, according to FactSet. Same with the Direxion Daily NVDA Bull 2X Shares (NVDU-US) where only 3.57% of its ownership is institutional. “That tells you most of the ownership is retail,” Todd Sohn told me. Incredible turnover Ownership of these instruments is not very important, because most turn over on a regular, even daily basis. Rhind noted that his firm (GraniteShares) controls $10 billion of the $18 billion of the AUM of single-stock ETFs. Of that $10 billion, he said, 30% turns over every day. “That tells you that the vast majority are holding these very short-term, which is the correct way to use these instruments,” he said. 24 hour trading This demand for U.S. tech stocks is tied in with a related story: the move toward global trading, or at least global trading of U.S. stocks. While a launch date is not yet set, the 24X National Exchange recently received approval from the SEC to operate 23 hours a day, five days a week. The NYSE has also announced plans to extend its trading hours to 22 hours a day, (1:30 AM ET-11:30 PM ET), five days a week. “With the advance of 22-hour trading, it [the U.S. market] will become even more attractive as a source of investment,” Rhind said. “There is definitely demand from overseas, particularly South Korea, Japan, and some demand in Europe,” Dmitri Galinov, CEO of the 24X National Exchange, told CNBC in October. “In addition, there are retail traders in the U.S. who want to trade at night. Many retail traders work during the day, they come home and want to trade beyond the 8 p.m. cutoff for trading.” Another twist: single stock ETFs that pay dividends There is yet another wrinkle on the single-stock ETF game: covered-call strategies. These usually involve an ETF that: 1) goes long the reference stock, and 2) sells a call or put option against it, normally with a one-month expiration. Selling the option generates income for investors. The option strike price becomes a cap on upside return, while the proceeds from selling the option “buffer” some of the downside. One example is the YieldMax NVDA Option Income Strategy (NVDY) , which goes long NVIDIA but sells covered calls with a strike price of approximately 0%-15% abvoe NVIDIA’s current share price, thus generating income. Rhind noted that GraniteShares had just launched its GraniteShares YieldBoost Tesla ETF (TSYY) in December, which generates income by selling puts on Tesla. He is expecting the first distribution in mid-January. Where is this going? Sohn, head of ETFs at Strategas, says it all boils down to: 1) mostly younger investors willing to take a risk on leverage and momentum, and 2) the global dominance of the U.S. tech market. “It is very akin to venture capital,” he told CNBC. “Place a bunch of small bets on different individual stocks and see which hits it big. With a 1% fee, the big winners help offset the products that don’t catch a following – or were misplaced at the start.” As for the U.S. tech market, “The U.S. has over-powered any other market available,” Sohn said, noting that the market cap of the U.S. stock market is now approaching 70% of the entire world market, “While most global markets have struggled to really make much headway, outside of say India, Canada or Japan recently.” Still, these products make little sense for longer-term investors, Morningstar’s Ryan Jackson wrote in April 2024 story critical of single-stock ETFs. Jackson conceded that “High-conviction traders with a single-day or shorter holding period may find them useful vehicles to express their views,” but after reviewing the data concluded: “But the fact is that these products are rarely sensible for everyday investors. They are flawed, costly, and liable to take more from investors than they give.” Of course, this all works, until it doesn’t. Momentum has a funny way of reversing, but until it does Sohn says the industry will continue to expand. “Now the race is on to find the next big volatile retail names. It could be Palantir, it could be quantum stock names, it’s not clear,” he said. Note: Will Rhind, founder and CEO of Graniteshares and the largest single-stock ETF provider, will be on the ETF portion of Halftime Report on Monday at 12:35 PM ET and streaming on ETF Edge from 1:10-1:30 PM. He will be joined by Ben Johnson, head of client solutions at Morningstar. ETFEdge.cnbc.com
