Despite the fact that ETFs are known as a great way to have a wide range of assets at rock bottom prices, the latest industry trend goes in the opposite direction.
ETFs focusing on only one stock have become a trend in recent years. In the last two months, 20 such ETFs have been launched, with the possibility of hundreds more on the way.
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The obvious question may be why would somebody invest in a single stock ETF when they can just purchase the company? The answer is that they layer something on top of the single stock exposure. Some use an inverse strategy and the short the underlying stock. Others use a leveraged strategy. At least one uses a hedged approach that limits the potential range of returns, much like the already out there buffer ETFs.
The SEC has gone on record with their concerns about single stock ETFs. I disagree with the SEC's recommendation to reject them when it already has approved a number of triple-leveraged oil ETFs and other products. They have however, limited the leverage that is being used in these ETFs. We will see if that changes in the future.
I don't believe there's a market for these outside of short-term traders. Long-term investors probably won't need them because of the expense ratios and the necessity to roll over derivatives exposure on a daily basis, although there are still individuals who want to add a little spice to a short-term trade.
With the list of available single stock ETFs, let's see where we are today.
ETFs with a Leveraged Stock Market are a great way to invest in a single stock.
Interest in these ETFs has been low at best. TSLL is the largest group, but it has just $7 million in assets, so I find that to be somewhat surprising. Even the 1.5X Coinbase ETF hasn't really gained any momentum, although it's still early to see whether or not they'll take off.
The SEC approved these ETFs based on the amount of leverage allowed. Nike and Pfizer are more established blue chip brands and, therefore, got a greater amount of leverage for NKEL and PFEL. Apple and PayPal are somewhat more volatile, so Im surprised that CONL and TSSL got approved for 1.5X exposure.
ETFs with a reverse origin
- AXS 1.5X PYPL Bear Daily ETF (PYPS)
- AXS 2X NKE Bear Daily ETF (NKEQ)
- AXS 2X PFE Bear Daily ETF (PFES)
- AXS TSLA Bear Daily ETF (TSLQ)
- AXS 1.25X NVDA Bear Daily ETF (NVDS)
- GraniteShares 1X Short Tesla Daily ETF (TSLI)
- Direxion Daily TSLA Bear 1X Shares ETF (TSLS)
- Direxion Daily AAPL Bear 1X Shares ETF (AAPD)
The majority of long ETFs listed above have short counterparts. AXS chose short-only versions of their Tesla and NVIDIA ETFs. TSLQ, TSLI, and TSLS are essentially identical in their exposures. NVDS has just a little bit of short leverage to provide some extra downside.
Single Stock ETFs that have been hedged
- Innovator Hedged TSLA Strategy ETF (TSLH)
TSLH is the more unique ETF of the group in that it combines an options strategy on top of Tesla to put a cap on positive returns and a floor on losses at 10%. Tesla can obviously have fluctuations like that on a daily basis, but for individuals who want to protect themselves from major losses, this might be an option.
There's definitely a market for these products, especially as an index ETF approach. There's reason to believe it might work for single stocks.
ETFs that are composed of single bonds
- U.S. Treasury 3 Month Bill ETF (TBIL)
- U.S. Treasury 2 Year Note ETF (UTWO)
- U.S. Treasury 10 Year Note ETF (UTEN)
These ETFs are particularly interesting. Whereas a lot of fixed income funds have potentially thousands of different bonds, these only hold one bond - the most recent issue of US government bonds at these maturities. It's as close as you'll get to owning the actual bond.
The advantage of these, using UTEN as an example, is that they will own the most recent 10-year note, but carry it over into the new 10-year note when it is issued. Youre basically getting consistent 10-year note exposure. If you buy an individual government bond, the remaining maturity changes over time as does its interest rate risk.
Each has a cost ratio of 0.15 percent, making them relatively inexpensive to own. TBIL and UTEN both have more than $20 million in assets.
Single-stock ETFs might experience two things: 1) dozens, if not hundreds, of these ETFs would be launched, and 2) most of them would have little interest. The only ones that are likely to be winners in terms of assets are those that are based on buzzy stocks, such as Tesla or Netflix or Twitter or some of the FAAMG names. Everything else will be DOA.
Single stock ETFs are trending in four directions - leveraged, inverse, buffer, and covered calls. The first three have already been launched, but I think it's coming. An ETF that owns Microsoft and writes calls based on the company's stock I believe might be an interesting strategy. High yield investors might be interested in capturing a 5%+ yield with equity exposure, as they have with other covered call ETFs.
I think these are certainly unique and will fill a gap or some investors, but not many. They will be for traders, but longer-term investors may not have much use for them. I believe a lot of these might eventually be closed due to lack of interest. This space may get watered down rapidly.
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