New single-stock ETFs come with risk
The exchange-traded fund industry is nothing if not innovative. And if you’ve got a strong appetite for risk and a very short outlook, a host of new ETFs will allow you to make outsize bets, up or down, on some of the market’s most meme-worthy stocks.
Single-stock ETFs use derivatives to give you a leveraged or inverse position in stocks such as Apple, Coinbase, Nvidia, PayPal and Tesla.
A leveraged bet means your returns will be amplified beyond the underlying stock’s performance; an inverse bet generally means you’re expecting the underlying share price to fall.
For example, the TSLA Bear Daily ETF (symbol TSLQ) from AXS Investments, an inverse ETF, will gain 5% on a day when Tesla shares drop 5%; Direxion Daily TSLA Bull 1.5X Shares (TSLL) would deliver a 7.5% loss that day (or a 7.5% gain on a day Tesla stock is up 5%).
Many of the new funds come with pricey expense ratios. Single-stock offerings from AXS and GraniteShares have a 1.15% expense ratio; Direxion has rolled out single-stock ETFs that charge 0.97%.
ETF analyst Aniket Ullal, of investment research firm CFRA, counts 16 singlestock ETFs so far, with collective assets of about $116 million. “You’re going to see a proliferation of these products, but only a handful will be successful,” he said.
The key to remember is that these funds are rebalanced daily, and they work best for traders with a similar time horizon.
With these ETFs, the arithmetic of compounding simply doesn’t work for someone expecting to earn the indicated daily return over a longer period, especially in a volatile or choppy market.
“I scratch my head and ask why any individual investor would need something like this, when realistically there’s a high probability they could lose a lot of money,” said Eric Diton, president of The Wealth Alliance, an investment advisory firm. “There’s enough octane in the stock market as is.”
Approval of the new securities from regulators at the Securities and Exchange Commission in July came with reservations and caveats.
“I have expressed concern about leveraged and inverse ETFs before,” said commissioner Caroline Crenshaw. “I worry that these single-stock ETFs pose yet another, perhaps greater, risk for investors and the markets.”
The concept behind these securities isn’t entirely new. Leveraged and inverse ETFs that track stock indexes have been around for years, as have single-stock ETFs in Europe.
For the narrow segment of high-conviction traders who monitor their portfolios daily and want to risk concentrated bets — let’s say you believe an upcoming earnings report could be explosive for a particular stock, for instance — the ETFs provide convenience and even some downside protection.
“My view is that these ETFs have a place in the market,” CFRA’s Ullal said. “But they need to be accompanied by a lot of investor education, a lot of disclosure and, hopefully, some responsible marketing on the part of the issuers.”