Few companies have captured the imaginations of investors quite like Space Exploration Technologies Corp. (ticker: SPCX). After years of private-market hype, the June SpaceX IPO blasted off at $135 per share, raising $75 billion and setting the record for the largest U.S. initial public offering ever.
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That public debut has opened the door for everyday investors to participate in one of the most talked-about growth stories on Wall Street. But some investors aren’t satisfied with simply buying common shares of SPCX stock. They want more upside potential — or a way to profit if the stock falls after an undoubtedly hyped-up IPO. That’s where leveraged and inverse SpaceX ETFs come in.
What Are Leveraged and Inverse ETFs?
For those unfamiliar with these risky products, leveraged ETFs use complex financial derivatives and sometimes aggressive borrowing to amplify gains. It is critical to understand the basics before looking for leveraged or inverse SpaceX ETFs, and it is equally important to understand your own risk tolerance before placing a trade.
The stated goal of most leveraged ETFs is to provide 2x or 3x the daily return of an underlying asset. But these funds come with elevated risk as well as the potential for double or triple the gains. Beyond the obvious challenge that 3x the gains also means 3x the losses when the market moves against you, there’s also the very costly nature of leveraged strategies: fees and expenses that add up quickly to amplify losses or offset gains.
Inverse ETFs are funds that perform the opposite of an underlying asset, meaning they go up when the investment goes down, and vice versa. These strategies also aren’t perfectly 1-to-1, as underlying instruments like futures and options often come with elevated fees or varied time horizons. Some inverse funds also deploy leverage, meaning a 3x inverse ETF could go up 9% on a day when the underlying asset drops by 3%.
Because these funds reset daily, their long-term performance can differ significantly from what investors might expect. But if you can get comfortable with the risk or just want to make a big single-day trade, these leveraged and inverse funds are an option for aggressive investors.
SpaceX Leveraged ETF Choices
Since SpaceX’s IPO, ETF issuers have rushed to launch products designed specifically around the stock. Among the major bullish leveraged ETFs, the current offerings include:
— ProShares Ultra SpaceX (SPCF), which targets twice the daily performance of SpaceX shares.
— Defiance Daily Target 2X Long SpaceX ETF (SPCU), which seeks 200% of SpaceX’s daily return through swaps and options.
— GraniteShares 2x Long SpaceX Daily ETF (SPAL), another product designed for investors with a bullish short-term outlook on the stock.
— Leverage Shares 2x Long SPCX Daily ETF (SPCH), which also targets twice the stock’s daily movement.
For investors who believe SpaceX may be overvalued or due for a pullback, several inverse funds have also launched:
— Leverage Shares 2x Short SPCX Daily ETF (SSPC), which seeks to deliver -2x the stock’s daily performance.
— GraniteShares 2x Short SpaceX ETF (SNK), another vehicle designed to benefit from declines in SpaceX shares.
Additional products from other providers are currently working through regulatory approval processes, so there may be more leveraged SpaceX ETFs and inverse SpaceX ETFs in the weeks ahead.
It’s also worth noting that current asset values for these funds remain low, in part because of reporting delays given the very recent IPO. Eventually, funds with chronically low assets may have to close up shop — but for now, it’s too soon to tell which funds will stay popular and which ones might fall away.
What Investors Can Expect From Leveraged SpaceX ETFs
Given the big debut of SpaceX, it’s not unrealistic to imagine a quick rise of 10% for shares over the course of a single trading day. A 2x leveraged ETF like the GraniteShares 2x Long SpaceX Daily ETF would theoretically gain about 20%. That’s before fees and tracking differences, of course, but while the gains won’t be exactly 2x, they will nevertheless be quite impressive.
Conversely, if SpaceX falls 10%, a 2x inverse ETF like the Leverage Shares 2x Short SPCX Daily ETF could gain roughly 20% before expenses and tracking variance.
These funds have obvious appeal for active traders who don’t need a margin account or access to options trading to deploy these strategies. But it’s worth remembering these funds are tracking daily 2x returns.
For round numbers, consider a scenario in which SpaceX is trading at $200 and rises 10% one day to $220. If it falls 10% the next day, the stock would not be back to even but down to $198 ($220 – $22). With ETFs that magnify gains and losses, that dynamic magnifies: A 2x bullish ETF would see shares rise 20% on the first day and fall 20% on the second, which leaves the investor with a 4% loss — not the 1% loss suffered by investors who just held SpaceX stock. What’s more, the high costs of leveraged ETF strategies are layered on top of that.
This phenomenon of compounded risk, called “volatility decay,” means leveraged ETFs can lose significant value over time even when the underlying asset ends up roughly flat. And the more volatile the stock, the greater the potential impact.
Keep this in mind before looking at any SpaceX ETFs. For long-term investors, leveraged and inverse ETFs are almost always too risky — and even for those with the appetite, they should be viewed as tactical tools for tight windows of time rather than long-term investments.
But if you have a strong short-term conviction about SpaceX’s direction and none of the disclaimers bother you, there are several options out there already — and likely more to come in the weeks ahead as everyone on Wall Street seems to be watching this innovative stock after its record IPO.
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How to Invest in SpaceX Through Leveraged and Inverse ETFs originally appeared on usnews.com
