Single-Stock ETF

What Are Single-Stock ETFs?

Single-stock exchange-traded funds (ETFs) are a new exchange-traded product allowing for leveraged or inverse trading of a single stock. They are intended to give ordinary investors a wider range of tools for navigating volatile markets by making it easy to go short on single stocks without having to sell them short. However, because of the way in which they are constructed and their use of leverage, regulators are warning that single-stock ETFs carry greater risk than ordinary ETFs and may be unsuitable for long-term investors.

Single-stock ETFs featuring leverage first appeared on European markets in 2018. Financial firm AXS Investments launched eight such products for the first time in the United States in 2022, allowing investors there to trade them.

How Single-Stock ETFs Work

Exchange-traded funds (ETFs) are single securities that can hold a portfolio of stocks. Indeed, the first ETFs were created to track broad-based indexes such as the S&P 500 or the Russell 2000. ETFs can also hold derivatives such as futures and options contracts in addition to, or instead of, shares of stock. This allowed for the advent of leveraged ETFs, which provide a multiple of the return of the underlying index or benchmark (for example, two times or three times the return of the S&P 500). This also allowed for inverse ETFs (and inverse-leveraged ETFs), which provide negative returns (for example, -1 time or -2 times the return of the index).

Single-stock ETFs do not hold a portfolio of stocks; rather, they track just a single stock but employ derivatives contracts to provide leveraged and/or inverse returns. Leverage is a double-edged sword, meaning that it can lead to significant gains but also lead to significant losses. Investors should be aware of the risks of leveraged ETFs, because the risk of losses is far higher than with traditional investments.

For example, a 1.5× leveraged bull single-stock ETF would likely own short-dated call options that provide a net delta of +150. A 2× bear single-stock ETF would instead hold put options in an amount resulting in a delta of -200.

Unique Risks

Because of how leveraged and inverse ETFs (including single-stock ETFs) are constructed, they tend to have a negative roll to maintain the proper derivatives position geared at returning a multiple of daily performance. This means that they naturally exhibit time decay and will tend to lose value over medium and long holding periods, regardless of the performance of the underlying assets. As a result, these products are intended only for day trading or very short-term holding periods.

Single-stock ETFs also may be prone to quickly lose value in volatile markets. An interview posted July 15, 2022, on Yahoo! Finance illustrates this point. Yahoo! Finance anchor Jared Blikre said, “If we take a hypothetical stock and it’s three times leveraged ETF, and we just kind of chop around with some volatile action. Let’s say they both begin at $100. And then let’s say we have a 20% up day followed by two 10% down days, a 20% up, a negative 20%, a negative 10%, another [negative] 20%. At the end of the day, guess what, the stock is worth $100.78, basically flat. Guess what, the ETF lost 40% of its value.”

Single-Stock ETFs in the U.S.

Single-stock ETFs first appeared on European markets in 2018. In the summer of 2022, they were launched in the U.S. for the first time by AXS Investments, a New York-based asset manager, which listed eight such products:

• TSLQ: -1× the daily performance of Tesla (TSLA)
• NVDS: -1.25× the daily performance of Nvidia (NVDA)
• PYPS: -1.5× the daily performance of PayPal (PYPL)
• PYPT: +1.5× the daily performance of PayPal (PYPL)
• NKEQ: -2× the daily performance of Nike (NKE)
• NKEL: +2× the daily performance of Nike (NKE)
• PFES: -2× the daily performance of Pfizer (PFE)
• PFEL: +2× the daily performance of Pfizer (PFE)

As of mid-2022, it is unclear whether the SEC will approve more single-stock ETFs in the U.S.

Example of a Single-Stock ETF

TSLQ is the ticker symbol for the AXS TSLA Bear Daily ETF. It seeks to return -1× the daily performance of Tesla (TSLA) shares.

Let’s see how the two securities performed on July 15, 2022. As shown in the chart below, comparing the two, TSLQ provides a close mirror image to the intraday returns of TSLA. Note, however, that the daily returns were not identically inverse: TSLA gained 0.74% at the close of that day, while the single-stock ETF TSLQ lost -0.63%. While this difference may be small for a single day, the tracking error between the two could compound over time, especially if the price swings up and down repeatedly.