Tesla (NASDAQ:TSLA) stock is one of the most widely held large-cap shares in the US and UK. Financial instruments linked to the Tesla stock price are also heavily traded in the US. Clearly, millions of investors worldwide are big fans of Tesla and Elon Musk, its largest shareholder.
I don’t hold the stock
As an older (I’m 55) value/dividend/income investor, I prefer to buy undervalued shares in established companies. Yet how I wish I’d bought some Tesla shares five years ago, before crazy hype sent them into orbit.
Over five years, the electric-car maker’s shares have skyrocketed by 845%. Thus, if I’d put $1,000 into Tesla half a decade ago, I’d have a tasty $9,450 today. As it happens, a friend of mine became a multi-millionaire by backing Elon Musk in 2018/19. Wow!
Tesla times two?
One reason I’ve never invested in Tesla is that its share price is incredibly volatile — like the S&P 500 on steroids and hallucinogens. But what if I could buy a share that doubles the capital gains from this mega-cap stock?
I can now do just this, thanks to the launch of two new US exchange-traded funds (ETFs). These two turbo-charged, leveraged stocks have been launched by two US partners, REX Shares and Tuttle Capital Management. Both funds use financial instruments to amplify the underlying shares’ daily returns. I’ll elaborate further below.
How do they work?
For the record, the two new funds/stocks are T-REX 2x Long Tesla Daily Target ETF (NASDAQ:TSLT) and the T-REX 2X Inverse Tesla Daily Target ETF (NASDAQ:TSLZ).
Say I were to buy the long ETF and Tesla stock rose by 5% that day. Then my gain would be 10% (or slightly less, due to breakage and charges). But if I’d bought the short ETF on that day, then I’d be down 10%.
However, these products are designed to double the daily return of Tesla shares — either up (long) or down (short). But thanks to ongoing charges and other technical factors, they will never exactly double Tesla’s gains/losses over the long term.
Furthermore, history has shown that such single-stock leveraged ETFs can be extremely dangerous. For example, during a massive spike in US market volatility on 5 February 2018, volatility ETFs got almost totally wiped out overnight.
For adrenaline junkies only?
I mentioned Tesla as a volatile stock earlier — of course, these two shares are even more unstable.
Last Monday (30 October), T-REX 2x Long Tesla Daily Target ETF closed at $16.30. On Friday, it closed at $20.08. Over the same period, T-REX 2X Inverse Tesla Daily Target ETF went from $43.56 to $34.71.
As one ETF expert remarked in a recent Financial Times article: “Leveraged and inverse ETFs have left many investors bloodied. These are dangerous products that face significant risk in the short term and are not intended to be held long term.”
Summing up, you couldn’t get me to buy either of these funds/stocks, even with free money. But I suspect that they might appeal to traders and speculators who enjoy volatility in the same way that thrill-seekers love riding roller coasters. However, that’s not the Foolish (capital F!) way of investing.
