Why This Amazon ETF Plunged Last Friday

Shares of Amazon (NASDAQ: AMZN) tumbled Friday after the company told investors it's planning to spend a staggering $200 billion this year, with its Amazon Web Services (AWS) unit being a focal point of those expenditures.

That signals the company's bullishness on artificial intelligence (AI). Investors are apprehensive about a spending plan that exceeds the market values of many companies, and those jitters explain why Amazon and exchange-traded funds (ETFs) with hefty allocations to the stock faltered on Friday.

Amazon's post-earnings slide spelled trouble for this ETF. Image source: Getty Images.

Things were even worse for Amazon-dedicated single-stock ETFs. Just look at the Direxion Daily AMZN Bull 2x Shares ETF (NASDAQ: AMZU). In late trading, that leveraged ETF is down 14% on volume more than six times the daily average. Even the most risk-tolerant traders shouldn't be surprised by this geared ETF's Friday woes. Here's why that's the case.

First, the Direxion ETF is what it claims to be. It's designed to deliver 200% of the daily performance of Amazon shares. So with that stock down 7% at this writing, this ETF's 14% drop confirms that it's behaving as expected today.

Second, traders considering any leveraged product need to focus on the operative: "daily." The issuer doesn't shy away from that terminology, and the lesson there is that market participants shouldn't ignore it, either. Put another way, while Amazon stock itself is a viable candidate for inclusion in long-term portfolios, this ETF isn't.

Leveraged ETFs, including the Amazon fund, pursue daily objectives. Again, the issuer comes right out and says this. The takeaway is that this Amazon ETF and other single-stock ETFs will perform as expected over a day or even a few days, but hoping these products to behave like the underlying stock over long-term holding periods is a potentially ruinous strategy.

Bottom line: Investors believing in Amazon's long-term story can use the Friday pullback to their advantage to add the stock. Active traders who say that retrenchment went too far, too fast may want to examine the Direxion ETF as a near-term rebound candidate. Just don't hold it for more than a day or two.

Todd Shriber has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon. The Motley Fool has a disclosure policy.