Single-stock exchange-traded funds (ETFs) have become a notable trend in the investment world, offering investors new ways to engage with individual stocks. These financial products, gaining traction since their introduction in European markets in 2018, allow investors to leverage or bet against single stocks. In the U.S., this market expanded significantly in July 2022 when AXS Investments launched its suite of single-stock ETFs, including leveraged versions for well-known companies like Nvidia (NASDAQ:NVDA) and Tesla (NASDAQ:TSLA). As these products continue to diversify, their appeal grows among retail investors eager to explore aggressive trading strategies.
Single-stock ETFs, despite their popularity among retail traders, are not without risks. Direxion’s recent launch of four single-stock ETFs, including the Direxion Daily AVGO Bull 2X Shares, highlights the ongoing expansion of this market segment. However, financial experts caution that these leveraged products may not be suitable for most retail investors due to their inherent volatility and risk. Historically, products like the GraniteShares 2x Long NVDA Daily ETF and GraniteShares 1.25x Long TSLA Daily ETF have shown that while there is potential for significant gains, the risks often overshadow the rewards.
Why Consider Single-Stock ETFs?
Single-stock ETFs are designed to provide traders with opportunities to express strong opinions on individual stocks. Greg Bassuk, CEO of AXS Investments, emphasized that these products appeal to those who wish to capitalize on high-conviction views, whether bullish or bearish. With leveraged ETFs like NVDL and TSL, the potential for magnified returns is significant, yet the possibility of losses is equally amplified.
What Are the Potential Risks?
The use of leverage in single-stock ETFs introduces a level of risk that many investors may not be prepared for. Financial advisors often warn against using borrowed funds for investing, as it can increase market volatility. Research by Morningstar has highlighted that portfolios financed with debt can be more aggressive despite appearing conservative in asset allocation. This aspect is crucial for investors to consider, as single-stock ETFs like NVDL may offer high returns but can also exacerbate losses.
The mechanics of single-stock ETFs further complicate their potential impact on portfolios. For instance, these ETFs typically reset their leverage daily, which can lead to unexpected results over time. A simplified example by Morningstar illustrates how even minor fluctuations in stock price can result in losses for investors holding leveraged ETFs, emphasizing the importance of understanding these products before investing.
The continuing development of single-stock ETFs indicates a persistent demand, though they may not fit all investment strategies. Financial advisors suggest that traditional investing approaches, such as buying and holding stocks while writing covered calls, may offer a more stable path to returns. These methods can provide income without the volatility associated with leveraged ETFs. As the market for single-stock ETFs grows, investors need to weigh potential rewards against the risks involved carefully.
