A new type of risky Exchange Traded Fund (ETF) is available starting this week to U.S. investors as the markets grow more volatile. These are very different from most ETFs, which typically invest in a large number stocks like a mutual fund. By contrast, single-stock ETFs now are being introduced to the market that take leveraged or inverse positions on a single stock. These leveraged single-stock ETFs are not intended for long-term investing. They mimic the performance of an ETF each day times a certain multiple, such as 2x or -2x the performance, for example.
- Leveraged single-stock ETFs are not meant for buy-and-hold investors, but for short-term positions.
- The SEC has warned that these complex products are high-risk and volatile, but is divided in its support for them.
- These assets should be used by people with a strong understanding of investing and a high-risk tolerance.
- FINRA is calling for regulators to revamp their oversight and require a knowledge test for investors interested in using single-stock ETFs.
A Look at Eight New Leveraged Single-Stock ETFs
AXS Investments this week is launching eight new leveraged single-stock ETFs focusing on companies including Tesla Inc. (TSLA), Nvidia Inc. (NVDA), PayPal Inc. (PYPL), Nike Inc. (NKE), and Pfizer (PFE).
Specifically, these funds are the: AXS TSLA Bear Daily ETF (TSLQ); AXS 1.25X NVDA Bear Daily ETF (NVDS); AXS 1.5X PYPL Bear Daily ETF (PYPS); AXS 1.5X PYPL Bull Daily ETF (PYPT); AXS 2X NKE Bear Daily ETF (NKEQ); AXS 2X NKE Bull Daily ETF (NKEL); AXS 2X PFE Bear Daily ETF (PFES); and AXS 2X PFE Bull Daily ETF (PFEL).
Europe was the first to launch leveraged and inverse single-stock ETFs in 2018. This is the first time the U.S. is entering the field of single-stock ETFs.
Warnings of High Risk
The introduction of these ETFs has sparked heated debate among regulators and investors about their risk.
FINRA, the nongovernmental regulatory authority, questions whether current regulations are enough to oversee leveraged singe-stock ETFs. FINRA is soliciting comment on several issues, including, “Whether the current regulatory framework, which was adopted at a time when the majority of individuals accessed financial products through financial professionals, rather than through self-directed platforms, is appropriately tailored to address current concerns raised by complex products and options.”
FINRA is also calling for retail customers to demonstrate their understanding of the risk associated with leveraged single-stock ETFs by passing a knowledge check. They recommend that if a customer fails to show proper understanding of the risk, they should be required to complete a course and assessment.
The Securities and Exchange Commission (SEC), which gave the green light to the new ETFs, appears to be divided on their benefits. Commissioner Caroline Crenshaw is calling for an update to the regulatory framework to better address the risks posed to investors and the markets. In a statement, she raised the question of "whether these products are appropriate in the public interest and consistent with the protection of investors. I strongly encourage my colleagues to consider rulemaking in this case.”
Lori Schock, the SEC's Director of the Office of Investor Education and Advocacy, is more supportive, but she also issued a statement warning investors not to hold single-stock ETFs for multiple days. “Importantly, like many other complex exchange-traded products, levered and/or inverse single-stock ETFs aim to provide returns over extremely short time periods (in some cases even a single day). New risks may emerge for investors who hold these products for longer than that.”
The Bottom Line
Leveraged single-stock ETFs provide new opportunities for investors in a volatile market, but at greater risk. These complex products are not for new investors and should be treated as high-risk. People with a strong base of investing knowledge and a high-risk tolerance should not treat these as buy-and-hold opportunities. They are meant to be used for short-term bets and trading.