Every investor looks for assets that can generate returns and align with their financial goals. While most stock investors interpret that as picking individual stocks or exchange-traded funds, there is a new type of investment that is attracting attention.
Single-stock ETFs are investment opportunities that combine your favorite stocks with leverage. These investments aren’t the best choice for long-term investors, and the Securities and Exchange Commission has expressed that these assets pose “a high level of risk for investors and the markets.” However, traders have been flocking to these assets in search of short-term gains.
What Is a Single-Stock ETF?
Single-stock ETFs combine the individual stock-picking process with leverage. Michael E. Pyle, financial planner and managing partner at Challenge Everything Financial, explains how the leverage from these ETFs can impact your portfolio: “The leveraged position of single-stock ETFs allows for a heightened profit (or loss) from an investment in single-stock ETFs versus individual stock investing.”
If you have a single-stock ETF with 2x leverage, for example, your gains and losses will double. A 5% gain for the underlying stock turns into a 10% gain for the 2x single-stock ETF.
These ETFs are different from leveraged ETFs that mirror index funds. For instance, ProShares UltraPro QQQ (ticker: TQQQ) is a leveraged ETF that gives investors three times the exposure to Invesco QQQ Trust (QQQ), an ETF that copies the Nasdaq 100. This leveraged ETF depends on the performance of several companies and is well diversified.
Single-stock ETFs do not offer the same diversification. A single-stock ETF only contains one stock, meaning your gains and losses depend on one asset’s performance. You can buy multiple single-stock ETFs that each hold a different company, but you don’t get instant diversification from holding onto one single-stock ETF.
Pros and Cons of Single-Stock Leveraged ETFs
Single-stock leveraged ETFs can be useful assets for traders. These assets have more volatility, and traders try to capitalize on short-term price movements as they seek profits. Gains and losses both get magnified. This type of atmosphere can help traders realize more gains, of course, but the opposite is also true.
Pyle says single-stock leveraged ETFs have another key advantage: “Single-stock ETFs allow for retail investors to have access to margin accounts, where brokers normally need to allow access for these accounts.”
Brokers have various requirements to obtain margin accounts, and not everyone can meet them. And even if investors have a margin account, not all brokers let them trade at 3x leverage.
However, a single-stock leveraged ETF makes leverage accessible to any investor. Not everyone should use leverage, though, and it comes with risks. However, some traders may be happy to know that it is readily accessible even if they don’t have a margin account yet.
“Emotions may be more involved with any one single-stock ETF investment, versus an investor who isn’t emotionally tied to any one company and chooses a more diversified approach to investing with a traditional ETF.” – Michael E. Pyle, managing partner at Challenge Everything Financial
While single-stock leveraged ETFs can help investors beat the market, it is important to exercise caution and not get overexposed to these assets. You have to buy shares in multiple single-stock ETFs to achieve diversification, and you have to stay on top of your portfolio.
While other ETF managers monitor portfolios and remove underperforming stocks for you, single-stock ETFs do not offer that same luxury. You have to stay on top of the earnings reports, industry trends and other details about your investments. It takes more work if you opt for single-stock ETFs, but that same truth also applies to buying individual stocks.
Even if you diversify your portfolio across several single-stock leveraged ETFs, Pyle points out that emotions can get in the way. “Investor behavior can play a factor in single-stock ETF investing,” he says. “Emotions may be more involved with any one single-stock ETF investment, versus an investor who isn’t emotionally tied to any one company and chooses a more diversified approach to investing with a traditional ETF.”
While emotions can swing high if you are overexposed to any stock, emotions can take an additional toll due to leverage. Any amount of leverage, even 1.5x, increases the stakes. Not every investor wants to take that type of risk, and not every investor can put themselves in that position.
Single-Stock ETF Fees
Single-stock ETFs get rebalanced every day, which results in higher fees. The derivatives that hold these funds together lose value due to time decay, and a single-stock ETF’s long-term returns can look significantly different from the performance of its namesake stock.
SEC Commissioner Caroline Crenshaw affirms that compounding rebalancing effects can cause these ETFs to diverge significantly from the performance of their underlying stocks over time. “Investors’ returns over a longer period of time might be significantly lower than they would expect based on the performance of the underlying stock. These effects are likely to be especially pronounced in volatile markets,” Crenshaw says.
7 Single-Stock ETFs to Consider
Single-stock ETFs still hold value as short-term investment opportunities. Traders can capitalize on higher volatility and leverage to get more dramatic price swings. While price swings do not guarantee positive returns, traders often seek volatile assets to increase their potential profit.
Investors who want to get exposure to single-stock ETFs may want to consider these seven funds:
-Direxion Daily AMZN Bull 1.5X Shares (AMZU)
-AXS 1.25X NVDA Bear Daily ETF (NVDS)
-GraniteShares 1.75x Long AAPL Daily ETF (AAPB)
-AXS TSLA Bear Daily ETF (TSLQ)
-Direxion Daily MSFT Bull 1.5X Shares (MSFU)
-AXS 1.5X PYPL Bull Daily ETF (PYPT)
-Direxion Daily GOOGL Bull 1.5X Shares (GGLL)
In conclusion, single-stock leveraged ETFs offer traders the opportunity to capitalize on short-term price movements and potentially increase their profits. However, these investments come with a high level of risk and are not suitable for long-term investors. It is important to exercise caution when investing in single-stock ETFs, as they lack the diversification of traditional ETFs and require active management. Additionally, the fees associated with single-stock ETFs can significantly impact long-term returns. Investors interested in these assets should carefully consider their risk tolerance and investment goals before proceeding.
Analyst comment
Positive news: Single-stock leveraged ETFs offer traders the opportunity to capitalize on short-term price movements and potentially increase their profits.
Negative news: These investments come with a high level of risk and are not suitable for long-term investors. They lack diversification and require active management.
Neutral news: The fees associated with single-stock ETFs can significantly impact long-term returns. Investors interested in these assets should carefully consider their risk tolerance and investment goals before proceeding.
As an analyst, the market for single-stock leveraged ETFs is likely to continue attracting traders looking for short-term gains. However, caution should be exercised due to the high level of risk involved, lack of diversification, and potential impact of fees on long-term returns. Investors should carefully evaluate their risk tolerance and investment goals before considering these assets.
