Hundreds of new funds launch, experts warn of risks
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Hundreds of exchange-traded funds have launched to allow investors to increase their bets on whether a single company’s shares will rise or fall.
This category single stock ETFsAs of December 9, there are a total of 377 US products, 276 of which are launching in 2025, according to Zachary Evens. Executive research analyst at Morningstar.
These funds can provide access to some of the most “exciting, biggest tech companies”: Nvidia, Tesla’s, Apple or Amazonsaid Evens.
But he said the funds also carry a “significant risk that the bet will go wrong.”
While investing in a single company stock provides one-time risk, single-stock ETFs offer strategies to magnify bets on the gains or losses of a single stock symbol. These may include swaps, futures and other derivatives.
Leveraged single stock ETFs provide greater returns in the short term. If a stock gains 2%, the ETF could return, say, a 4% gain or another multiple, depending on the strategy.
Inverse ETFs offer investors the opposite of stock returns. For example, if a stock increases by 1%, the ETF may decrease by the same amount.
And covered call ETFs allow investors to bet that a company’s stock will rise while selling call options against it, in order to generate income for investors.
These are designed to obtain these results on a regular, even daily basis and recalculate exposure rates.
Despite the funds’ promises that their strategies can increase investors’ gains, experts say buyers should be wary of the risks. alert the SEC Similarly, it was shared in 2022, when these products first appeared.
SEC Commissioner Caroline Crenshaw wrote that over the long term, investors’ returns may be “significantly lower than they expected based on the performance of the underlying stock,” and that this will be even more pronounced in volatile markets.
‘The experience of many investors is not positive’
As of Nov. 30, the all-time cumulative flow from single-stock ETFs was about $44 billion, according to Morningstar Direct data. Year-to-date flows are $22.3 billion.
However, the funds have $41.2 billion in assets under management as of November 30.
“They actually took more money than they currently have in assets,” Evens said. “Overall their performance has not been positive, and many investors’ experiences have probably not been positive either.”
The single-stock ETF fund market is too heavy, Evens said. Only seven funds have more than $1 billion in assets each, while 303 funds have less than $100 million in assets each, he said. Remarkably, 29 of them have less than $1 million each.
Largest fund by net assets as of November Direxion Daily TSLA Bull 2x StockApproximately $6.4 billion, according to Morningstar data. This was followed by the GraniteShares 2x Long NVDA Daily ETF with approximately $4.3 billion and the YieldMax MSTR Option Income Strategy ETF with approximately $1.9 billion.
In general, many products will not be successful in gaining significant market share, Evens said. But the chance to do so, along with higher fees, is a lucrative opportunity for providers, he said.
Single-stock ETFs came in at 1.07% annual fee for the average investor as of the end of March 2024. Morning Staror three times the cost of the average U.S. fund.
What’s more, according to Evens, there are “nearly endless iterations” of possible single-stock ETF strategies based on thousands of U.S. stocks and a variety of approaches, including derivatives and swaps.
“They can just keep throwing these around and hope lightning in a bottle eventually strikes with them,” Evens said.
Single stock ETFs are not intended to be held long-term
More investors are asking about single-stock ETFs, especially those tied to stocks Tesla’s, Nvidia, Amazon And Applesaid Ashton Lawrence, a certified financial planner, manager and senior wealth advisor at Mariner Wealth Advisors in Greenville, South Carolina.
Much of this interest comes from investors looking to capitalize on past gains and future returns, he said.
Such ETFs may be suitable for “very small satellite positions” for investors with very short-term time horizons, Lawrence said.
But he said the strategies are generally not suitable for individuals investing long-term for retirement, trying to reduce volatility or currently concentrating on single stock positions.
“It’s really just a tool, but any tool, [a] “If you’re applying it to the wrong situation, it’s a bad experience,” Lawrence said.
Because ETFs reset daily and use leverage, their performance can meaningfully deviate from stocks over time, Lawrence said. So while an investor might expect that an ETF marketing for 2x the risk would mean a 200% return on a stock that’s up 100% in three years, that won’t always be the case, he said.
Evens said investors should keep in mind that these funds are trading instruments.
“These are speculative instruments that are not intended to be held for long periods of time,” Evens said, and instead are intended to be held for a day or two, or even just a few hours during the day.
Still, there are risks in the short term. Last Morning star research found that leveraged single-stock ETFs did not deliver the returns they promised over more than a single day. Moreover, some of the most highly leveraged single-stock ETFs fail to deliver their target returns on an average day.
One reason these strategies face difficulties is because of reduced volatility. Evens said that if a stock falls 10 percent, there must be a gain of more than 10 percent to break even, while the value of the investment can decline over time due to leverage and volatility.
