Should You Buy Single-Stock ETFs?

Single-stock ETFs enable investors to make leveraged, inverse or hedged bets on a single stock without the risk of short-selling or options. The goal is to allow ordinary investors without access to these advanced strategies to better navigate volatile markets. For instance, they enable investors to bet against a stock without risking more than their principal.

While most ETFs hold a basket of stocks or other securities, single-stock ETFs hold derivatives options that power their strategies. For example, a 1.5x leveraged bull single-stock ETF might own short-dated call options that offer a net delta of +150. These ETFs may also use hedging strategies that involve more complex options positions.

Single-stock ETFs have many of the same risks as short-selling or using options. But unlike these strategies, single-stock ETFs typically rebalance daily, which affects compounding and may cause returns to deviate from the performance of the underlying stock. As a result, investors who don’t understand these risks might experience unexpected performance.

The most popular single-stock ETFs cover highly volatile or active underlying companies. For example, Tesla Inc. (TSLA) has a beta of 2.18—suggesting it’s twice as volatile as the overall market—with about $30 billion in average daily trading volume, making it an excellent fit for both leveraged and inverse single-stock ETFs.

The actively managed AXS TSLA Bear Daily ETF (TSLQ) is an inverse ETF that seeks a -100% daily performance of the company’s common shares. As a result, investors with a bearish view of the electric vehicle maker can purchase ETF shares, which will appreciate when the price of Tesla’s common stock moves lower as an alternative to short-selling the stock.

On the other hand, the actively managed Hedged TSLA Strategy ETF (TSLH) tracks the upside performance of Tesla to a cap while providing a fleet against a loss of more than 10% over the outcome period. In other words, investors can retain some Tesla upside while limiting losses to 10%, which might be valuable for a stock known for its volatility.

Other actively managed single-stock ETFs include:

• AXS 1.25X NVDA Bear Daily ETF (NVDS) – takes a bearish view on Nvidia
• AXS 1.5x PYPL Bull Daily ETF (PYPT) – takes a bullish view on PayPal
• AXS 1.5x PYPL Bear Daily ETF (PYPS) – takes a bearish view on PayPal
• AXS 2x NKE Bull Daily ETF (NKEL) – takes a bullish view on Nike
• AXS 2x NKE Bear Daily ETF (NKEQ) – takes a bearish view on Nike
• AXS 2x PFE Bull Daily ETF (PFEL) – takes a bullish view on Pfizer
• AXS 2x PFE Bear Daily ETF (PFES) – takes a bearish view on Pfizer

SEC Commissioner Caroline Crenshaw recently warned that leveraged and inverse ETFs could pose a significant risk for investors and the markets. While she acknowledges that certain investors who understand their unique features might benefit, retail investors can and do access these kinds of products through self-directed trading accounts.

Investors should take the time to understand these products before incorporating them into their portfolios, especially when holding them for longer than one day. The unusual effects of daily rebalancing or the timing of hedging resets can lead to unexpected results. In addition, investors must balance convenience with cost and performance.

Single-stock ETFs have become extremely popular over the past month or two as new issuers enter the market. While it’s tempting for investors to bet against a big-name stock without short-selling it, it’s essential to understand how these funds work before committing any capital.

Take a look at our recently launched Model Portfolios to see how you can rebalance your portfolio.