Investors Continue to Embrace Single-Stock ETFs
Despite the risks involved, more and more risk-seeking investors are jumping into the single-stock exchange-traded fund (ETF) market. These ETFs, which first emerged in Europe in 2018 and are now available in the US, track individual stocks such as Apple, Microsoft, Alphabet, Nvidia, Amazon, Tesla, Meta, Coinbase, and Alibaba. According to Morningstar, single-stock ETFs collectively have around $3.3 billion in net assets. The popularity of these leveraged ETFs is not surprising given the surge in big-tech stocks and the overall performance of the Nasdaq. Experts believe that single-stock ETFs are here to stay as they tap into the gambling mindset prevalent in the markets.
The Top Single-Stock ETFs
Morningstar reports that there are a total of 45 single-stock ETFs available in the market from providers like Direxion, AXS, GraniteShares, and YieldMax. The largest by asset size is the Direxion Daily TSLA Bull 1.5X Shares which tracks Tesla and surpassed $1 billion in assets. The YieldMax TSLA Option Income Strategy ETF comes second with around $841 million in assets. The GraniteShares 1.5x Long NVDA Daily ETF holds third place with approximately $245 million in assets. These leveraged and inverse ETPs use various investment strategies such as swaps and futures to achieve their returns.
Expect More High-Risk ETFs
Rich Lee from Robert W. Baird & Co. predicts that more single-stock ETFs with options overlay strategies and income components will hit the market. YieldMax already offers several of these ETFs that aim to generate monthly income through call options on single company stocks. The appetite for single-stock ETFs continues to grow, and there will likely be more innovation in combining different themes and exposures under the ETF wrapper. These ETFs offer a way to quickly gain exposure with leverage.
Using Single-Stock ETFs is Not a Long-Term Strategy
The performance of single-stock ETFs can vary significantly. While some have seen positive returns, others have experienced negative returns. However, these ETFs are primarily designed for traders and individual investors with a high tolerance for risk. They are not suitable for long-term investment strategies due to their high costs and volatility. It is important for investors to understand the risks associated with these products and not treat them as buy-and-hold investments.
The SEC’s Warning to Retail Investors
The US Securities and Exchange Commission (SEC) has issued a warning about the risks of single-stock ETFs. The SEC emphasizes that these products amplify the price movements of individual stocks, leading to greater volatility and risk for investors compared to holding the underlying stock itself. Retail investors should approach these ETFs with caution and be prepared to monitor their positions daily. These vehicles are better suited for sophisticated retail investors and professionals who can take a short-term view.
Hot Take: The Future of Single-Stock ETFs
The single-stock ETF market is expected to continue growing, with new products being introduced regularly. As assets, daily volume, and scale play a role in determining success, AI is seen as a hot area for future single-stock ETFs. Providers like Direxion are closely monitoring market trends and looking for opportunities to bring new single-stock ETFs to investors.
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