Leveraged single-stock exchange-traded funds (ETFs) have become increasingly popular with retail investors this year, but the head of an ETF provider says they come with some significant risks.
In an interview with BNN Bloomberg on Thursday, Christian Magoon, CEO of Amplify ETFs, said that many investors have been “caught up in recency bias” and have become heavily concentrated in popular growth stocks such as Nvidia.
“Buying a one-and-a-half-times leveraged Nvidia ETF is just too appealing for many retail investors. With that being said, we do not see, generally, financial advisors even having access to these because of their extreme risks,” he said.
Magoon said that while leveraged ETF plays can lead to higher short-term returns, the downside risks can be “brutal.”
He cautioned that if an investor in a leveraged single-stock ETF picks the wrong entry point, losses will compound on a daily basis as the leverage resets, leading to increased downside risks compared to owning the stock outright.
“We think that these can be very volatile and dangerous for many investors. Only maybe the most sophisticated traders that might even have less than a day’s time horizon might want to look at this,” Magoon said.
Magoon added that his firm has taken the opposite approach to leveraging the growth of this year’s high-flying tech stocks such as Nvidia by launching a fund that owns those stocks while writing cover calls against them, increasing options income and lowering volatility.
“In our experience, most professional advisors and retail investors over a longer period of time want a smoother ride not a more volatile ride because it takes a lot of the emotion out of owning these types of growth stocks,” he explained.
