Derivative-Based ETFs at the Heart of the Historic Market Run

After a week of intense market turmoil, Wall Street staged a historic comeback, posting one of its strongest single-day rallies in years. The rebound followed President Trump's decision to pause the largest tariff hikes on key trading partners for 90 days. The tariff pause was perceived as a positive step toward more stable international trade relations, encouraging market participants to re-enter equities with renewed confidence (read: Tariff Relief Boosts Tech ETFs: Is More Upside Ahead?).

The S&P 500 soared 9.5%, marking its best day since 2008, while the tech-heavy Nasdaq surged 12.1%, its second-largest one-day gain on record. The Dow Jones Industrial Average jumped 7.9%, witnessing its biggest rally since 2008. While the gains were broad-based across sectors, technology stocks led the rally. 

Magnificent Seven stocks, which bore the brunt of the sell-offs, were among the biggest gainers. Tesla (TSLA) skyrocketed 22.6%, while NVIDIA (NVDA) and Apple (AAPL) surged 18.6% and 15.3%, respectively. Amazon (AMZN) rose 12%, while Meta Platforms (META) jumped 15%. Other technology stocks like Arm Holdings (ARM) advanced 24% and Broadcom (AVGO) gained 19% (read: Apple Stock Suffers Sharp Selloff: Buy the Dip in ETFs?).

Given this, several derivative-based ETFs were at the forefront of the historic rally. These are Defiance Daily Target 2x Long MSTR ETF MSTX, STKd 100% NVDA & 100% AMD ETF LAYS, STKd 100% MSTR & 100% COIN ETF APED, Battleshares TSLA vs F ETF ELON and STKd 100% SMCI & 100% NVDA ETF SPCY.

Derivative-based stock ETFs are specialized investment funds that utilize derivative instruments — such as options, futures, and swaps — to gain exposure to underlying assets or a specific company. Unlike traditional ETFs that primarily hold a basket of physical stocks, these ETFs employ derivatives to amplify returns, hedge risks, or provide inverse performance relative to an underlying stock.

ETFs in Focus

Defiance Daily Target 2x Long MSTR ETF (MSTX) – Up 48.8%

Defiance Daily Target 2x Long MSTR ETF seeks daily leveraged investment results of two times the daily percentage change in the share price of MicroStrategy (MSTR). It charges 1.29% in annual fees and has AUM of $850 million.

STKd 100% NVDA & 100% AMD ETF (LAYS) – Up 42%

STKd 100% NVDA & 100% AMD ETF invests in two of the most innovative chipmakers, fueling artificial intelligence, cloud computing, and next-gen gaming. It is an actively managed ETF that employs derivatives, namely swap agreements and/or listed options contracts, to gain long exposure to two NVIDIA and Advanced Micro Devices (AMD). LAYS has gathered $0.7 million in its asset base since its inception a month ago. It charges 1.29% in annual fees. 

STKd 100% MSTR & 100% COIN ETF (APED) – Up 40.5%

STKd 100% MSTR & 100% COIN ETF seeks to employ derivatives, namely swap agreements and/or listed options contracts, to gain long exposure to two underlying securities, MicroStrategy and Coinbase Global (COIN). It brings together the leading institutional Bitcoin holder and the top U.S.-based crypto exchange, offering exposure to both ownership and trading of digital assets. APED has accumulated $0.5 million in its asset base since its inception a month ago. It charges 1.29% in annual fees. 

Battleshares TSLA vs F ETF (ELON) – Up 35.8%

Battleshares TSLA vs F ETF offers unique investment opportunities and is the first of its kind. ELON aims to capture the battle between innovation and tradition in the automotive industry by taking targeted positions in two specific companies, one of which the advisor views as a new leader in this industry — Tesla — and one which the advisor views as a legacy leader in this industry — Ford Motor (F).

ELON employs a unique investment strategy by establishing a leveraged long position in Tesla, targeting 180-220% of the fund’s net assets, and a leveraged short position in F, targeting 80-120% of the fund’s net assets. This means that ELON will benefit if TSLA’s share price outperforms F’s share price after considering the effects of leverage. ELON has newly debuted in the space in February and has gathered $0.8 million in its asset base. It charges 1.29% in expense ratio (read: Tesla Sees Worst Vehicle Sales in 3 Years: ETFs in Focus).

STKd 100% SMCI & 100% NVDA ETF (SPCY) – Up 34.1%

STKd 100% SMCI & 100% NVDA ETF offer exposure to companies at the forefront of AI workloads, cloud computing and data center expansion. It employs derivatives, namely swap agreements and/or listed options contracts, to gain long exposure to two underlying securities, Super Micro Computer (SMCI) and NVIDIA. SPCY has accumulated $0.3 million in its asset base since its inception a month ago. It charges 1.29% in annual fees.

Downside Risk to Derivatives-Based Investing

Investment in these ETFs comes with significant risks due to their lack of diversification and exposure to the volatility of a single or two stocks. They are typically more suited for experienced investors who understand and are willing to accept these risks. Here is the risk associated with these ETFs:

High Risk: If the specific company underperforms, investors could lose a substantial amount of money.

Lack of Diversification: One of the key principles of risk management in investing is diversification. Derivatives-based ETFs go against this principle, as they are invested entirely in one or two companies.

Market Volatility: A derivatives-based ETF is subject to the volatility of the individual stock, which can be influenced by company-specific news and events.

Liquidity Risk: Some derivatives may be less liquid, making it challenging to enter or exit positions without significantly affecting the price. 

Management Fees: While typically lower than mutual funds, ETFs still come with significant management fees, which can eat into investment returns over time.

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This article originally published on Zacks Investment Research (zacks.com).

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