2 Reasons to Buy NVDL and 3 Reasons Not to

Nvidia (NASDAQ: NVDA), one of the market's hottest growth stocks, has surged 27,590% over the past decade as its sales of discrete GPUs soared. That boom was largely fueled by the expansion of the AI market, which drove many companies to upgrade their data centers with its top-tier GPUs to process complex machine learning and AI tasks.

Nvidia's stock rose about 16% over the past 12 months, even as the company grappled with tighter export curbs, tariffs, and other macroeconomic headwinds. However, investors who wanted even bigger gains were likely drawn toward the GraniteShares 2x Long NVDA Daily ETF (NASDAQ: NVDL), which aims to double Nvidia's gains on a daily basis.

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That sounds like an incredible way to profit from the AI boom, but is it really a good investment? Let's review the two reasons to buy the Granite Shares ETF -- and three reasons to avoid it.

The two reasons to buy

The Granite Shares ETF might be an appealing investment for two reasons. First, it can help short-term traders generate big gains from any news or earnings-driven rallies for Nvidia.

Second, it aims to double the chipmaker's daily returns with total-return swaps and other derivatives. These derivatives can be difficult for mainstream investors to understand, so the ETF simplifies the process in a package and eliminates the need for a margin account or options trading. Therefore, investors won't ever lose more than their initial investment or be hit by margin calls during a downturn.

The three reasons to avoid NVDL

The NVDA Daily ETF might sound like a good way to profit from Nvidia's gains, but it has three glaring weaknesses. First, its gains aren't cumulative because it resets its 2x objective on a daily basis. Second, it also doubles Nvidia's losses if it declines.

So while the ETF might be a good short-term play if Nvidia's stock rallies for several consecutive days, a single red day can wipe out a lot of those gains. That's why the NVDA Daily ETF has been a terrible investment for the long term. Over the past 12 months, its shares actually declined 17% even as Nvidia's stock rose.

Even if Nvidia rallies over a long period, the ETF can suffer a volatility drag behind its underlying stock because it makes adjustments every day to meet its investment objective. That constant rebalancing, along with its leverage, makes it tougher for the fund to stay ahead of Nvidia and meet its goal of doubling the chipmaker's daily returns.

Lastly, the NVDA Daily ETF charges a high net annual operating expense ratio of 1.15%, and it only aims to double Nvidia's daily returns "before fees and expenses." For long-term investors, it would be cheaper to simply buy Nvidia stock directly or invest in a low-cost ETF like the Invesco QQQ Trust (NASDAQ: QQQ) -- which tracks the Nasdaq-100 for a low expense ratio of 0.20% and includes exposure to Nvidia along with dozens of other Nasdaq-listed stocks.

So should investors buy or avoid NVDL?

Warren Buffett famously told investors to be fearful when others are greedy. And the GraniteShares 2x Long NVDA Daily ETF clearly targets greedy investors and doesn't seem like a better buy than Nvidia. It's designed for day traders, it charges high fees, and it will likely underperform Nvidia over the long term.

If you're bullish on Nvidia, you should simply buy its stock. From fiscal 2025 to fiscal 2028 (which ends in January 2028), analysts expect its revenue and earnings per share to have compound annual growth rates of 30% and 28%, respectively, as it keeps selling the best picks and shovels for the AI gold rush -- and it still looks reasonably valued at 35 times this year's earnings.

Buying this ETF might help you outperform Nvidia over a few days, but it will sorely disappoint investors who expect it to magically double the chipmaker's returns over the next few years.

Should you invest $1,000 in GraniteShares ETF Trust - GraniteShares 2x LongDA Daily ETF right now?

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Leo Sun has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Nvidia. The Motley Fool has a disclosure policy.