By Christine Idzelis
Hi! In this week’s ETF Wrap, you’ll get a look at the wave of single-stock ETFs that have recently hit the market — and whether they may be geared toward your investment approach.
Single-stock ETFs have made a big splash in the exchange-traded-fund industry, but they’re not for everyone.
“These single-stock ETFs are day-trading tools,” said Nate Geraci, president of wealth management firm The ETF Store, in a phone interview. They should only be used by “sophisticated traders” but “where they’re going to end up is in the hands of unsophisticated retail investors,” he said. “I do worry about that.”
Last month, AXS Investments announced that it was launching the first single-stock ETFs in the U.S. , offering investors a way to make bearish or bullish bets on such companies as Tesla Inc /zigman2/quotes/203558040/composite TSLA -4.59% ., Nvidia Corp. /zigman2/quotes/200467500/composite NVDA -0.36% , PayPal Holdings Inc. /zigman2/quotes/208054269/composite PYPL -0.79% , Nike Inc. /zigman2/quotes/203439053/composite NKE -1.55% and Pfizer Inc. /zigman2/quotes/202877789/composite PFE -1.10% They’re not meant to express long-term investment views and they’re risky, as investors could lose all their money on a wrong-way bet.
Single-stock ETFs are for “active traders who are looking to make very short-term, higher-conviction trades” while understanding that the funds are “reset on a daily basis,” said Greg Bassuk, chief executive officer of AXS Investments, by phone. They’re not aimed at “buy-and-hold investors,” he said, and they’re not meant as “portfolio building blocks, or asset allocation tools.”
Single-stock ETFs don’t actually own the stock of a company, rather they’re exposed to derivative contracts called “swaps,” according to Bassuk. “Every day the swap resets.”
In using swaps to gain exposure to individual companies, single-stock ETFs are turning to a financial institution that has agreed to provide the underlying returns and the swaps are settled daily, The ETF Store’s Geraci explained.
“Single stock ETFs are basically an easy-button approach to shorting or levering up on individual names,” he said. “Some sophisticated investors may find that attractive.”
But a wrong-way bet could be disastrous for investors, Geraci warned.
“It’s absolutely possible for these products to go to zero or near zero,” he said.
Single-Stock ETFs for bulls, bears
Short-term traders who are bullish about a company on a particular day can leverage their wager through a single-stock ETF.
For example, a single-stock ETF that seeks to leverage returns by say two times would mean investors would get twice the daily gain of the underlying company’s shares if their bullish bet was correct, according to Bassuk. While “every single day you’re getting that 2x return,” investors should not expect that over a longer period of time, such as one month, that they’d reap twice a stock’s gain over that stretch, he cautioned. “The math doesn’t work that way.”
As for a bearish view on a company, traders might use a single-stock ETF to bet that the company’s share price will fall on a given day. Bassuk said that investors won’t lose more than their investment in a bearish single-stock ETF, unlike traditional ways of shorting stocks.
A bearish single-stock ETF provides investors with the inverse performance of its shares on a particular day, and also can be leveraged.
Investor reception for the AXS TSLA Bear Daily ETF /zigman2/quotes/236905666/composite TSLQ +4.50% was particularly successful “out of the gate” after launching, said Bassuk. He said offering its suite of eight single-stock ETFs just as companies were reporting their second-quarter earnings results was “fortuitous.”
That’s because trading activity tends to pick up around individual stocks when there’s a specific company event or news, said Bassuk. The firm’s single-stock ETFs are “definitely for more experienced traders who are looking to either hedge other positions that they have, or they’re positioning their trades in advance of earnings.”