The exchange-traded fund (ETF) 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 (AAPL), Coinbase (COIN), Nvidia (NVDA), PayPal (PYPL), Tesla (TSLA) – even Nike (NKE) and Pfizer (PFE). 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 (TSLQ, $38) 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, $26) would deliver a 7.5% loss that day (or a 7.5% gain on a day Tesla stock is up 5%).
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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 single-stock 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 predicts.
Keep an Eye on the Calendar
The key to remember is that these funds are rebalanced daily, and they work best for traders with a similar time horizon.
"These are very clearly tools for day traders – and I mean literally a day," says Dave Nadig, a financial futurist with investment research firm VettaFi.
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. In that scenario, for example, it would not be unusual to see a stock price finish flat after bouncing around over the course of a month or more while the ETF tracking the stock finishes down sharply over the period.
"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," says 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. For example, traders using margin loans to effect the same kind of leverage risk losing more than the cost of their investment if the market moves against them.
"With single-stock ETFs, you cannot lose more than you invest," says AXS CEO Greg Bassuk.
"My view is that these ETFs have a place in the market," says CFRA's Ullal. "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."
FAQs
Single-stock ETFs are leveraged ETFs whose performance is related to the daily return of an individual stock. For example, if Amazon stock increased by 2%, a 2X Amazon single-stock ETF would increase by 4%.
Is 1 ETF enough? ›
Generally speaking, fewer than 10 ETFs are likely enough to diversify your portfolio, but this will vary depending on your financial goals, ranging from retirement savings to income generation.
How many ETFs is enough? ›
"You can get broad-based diversification with one ETF, commonly referred to as diversified ETFs, or you can build a portfolio of five to 10 ETFs that would offer good diversification," he says. The choice you make on the above depends on your investment goals and risk appetite, like any investment.
What is a simple way to explain ETF? ›
ETFs or "exchange-traded funds" are exactly as the name implies: funds that trade on exchanges, generally tracking a specific index. When you invest in an ETF, you get a bundle of assets you can buy and sell during market hours—potentially lowering your risk and exposure, while helping to diversify your portfolio.
What is an example of a stock ETF? ›
Popular ETFs
iShares Russell 2000 (IWM): An ETF that tracks the Russell 2000 small-cap index. Invesco QQQ (QQQ) (“cubes”): An ETF that tracks the Nasdaq 100 Index, which typically contains technology stocks.
What is the meaning of single stock? ›
Single Stock Futures (SSFs)
Stock Options. Definition. A contract to buy or sell a single stock at a future date at a specific price. A contract that gives the holder the right, but not the obligation, to buy or sell a stock at a given price on or before a specific date.
Is it OK to invest only in ETFs? ›
ETFs make a great pick for many investors who are starting out as well as for those who simply don't want to do all the legwork required to own individual stocks. Though it's possible to find the big winners among individual stocks, you have strong odds of doing well consistently with ETFs.
Can I own just one ETF? ›
Instead of buying individual ETFs for the US, Europe, China, and emerging markets, you can simplify by purchasing one ETF that covers all these countries.
What is a good ETF size? ›
Level of Assets: An ETF should have a minimum level of assets, with a common threshold being at least $10 million. An ETF with assets below this threshold is likely to have a limited degree of investor interest, which translates into poor liquidity and wide spreads.
How long should I hold an ETF? ›
Holding an ETF for longer than a year may get you a more favorable capital gains tax rate when you sell your investment.
SPY, VOO and IVV are among the most popular S&P 500 ETFs. These three S&P 500 ETFs are quite similar, but may sometimes diverge in terms of costs or daily returns. Investors generally only need one S&P 500 ETF.
How much money should I put in ETFs? ›
You expose your portfolio to much higher risk with sector ETFs, so you should use them sparingly, but investing 5% to 10% of your total portfolio assets may be appropriate. If you want to be highly conservative, don't use these at all. Consider the two funds below.
What is an ETF in layman's terms? ›
An ETF, or Exchange Traded Fund is a simple and easy way to get access to investment markets. It is a pre-defined basket of bonds, stocks or commodities that we wrap into a fund and then we list onto the exchange so that everyone can use it.
Are ETFs best for beginners? ›
Exchange-traded funds (ETFs) are ideal for beginning investors due to their many benefits, which include low expense ratios, instant diversification, and a multitude of investment choices. Unlike some mutual funds, they also tend to have low investing thresholds, so you don't have to be ultra-rich to get started.
Should I invest in single stocks or ETFs? ›
ETFs offer advantages over stocks in two situations. First, when the return from stocks in the sector has a narrow dispersion around the mean, an ETF might be the best choice. Second, if you are unable to gain an advantage through knowledge of the company, an ETF is your best choice.
What are the disadvantages of a single stock? ›
Cons of Holding Single Stocks
- It is harder to achieve diversification. ...
- Achieving this diversification is harder the less money you have. ...
- It requires more time from you to monitor your portfolio. ...
- You must keep your emotions in check.
A stock gives you one share of ownership in a single company. An index fund is a portfolio of assets which generally includes shares in many companies, as well as bonds and other assets. This portfolio is designed to track entire sections of the market, rising and falling as those segments do.
Is it better to buy one ETF or multiple? ›
Experts agree that for most personal investors, a portfolio comprising 5 to 10 ETFs is perfect in terms of diversification.
