The Rise of Single-Stock ETFs: Here’s what Investors Need to Know
Traders work on the floor of the New York Stock Exchange. Brendan McDermid | Reuters
Collectively, single-stock ETFs have about $3.3 billion of net assets, according to Morningstar. The growth of these single-stock ETFs, which are leveraged, is not particularly surprising, given that the Nasdaq is up more than 40% this year and big-tech stocks are soaring. But they’ve likely earned a long-term spot in the market.
Single-stock ETFs “are here to stay,” said Bryan Armour, director of passive strategies research for North America at Morningstar. The strategy “taps into some of the gambling mindset that exists in markets,” he said.
There are 45 single-stock ETFs in total, according to Morningstar, from a handful of providers including Direxion, AXS, GraniteShares, and YieldMax. These ETFs follow bull, bear, or option income strategies.
The largest by asset size is the Direxion Daily TSLA Bull 1.5X Shares, which tracks Tesla. In July, it became the first of its kind in the U.S. to surpass the $1 billion asset mark. The second-largest single-stock ETF by asset size is the YieldMax TSLA Option Income Strategy ETF, which had around $841 million of assets at the end of November, according to Morningstar. In third place by asset size is the GraniteShares 1.5x Long NVDA Daily ETF, which tracks Nvidia and has soared in a year dominated by artificial intelligence optimism and the gains for chipmakers. It had about $245 million in assets at the end of November, Morningstar data shows.
To achieve their stated returns, leveraged and inverse ETPs often use a range of investment strategies. This can include swaps, futures, and other derivatives as well as long or short positions, according to a FINRA explainer.
Rich Lee, head of program and ETF trading at Robert W. Baird & Co., expects to see more single-stock ETFs with an options overlay strategy and income component. “It’s a way to get quick exposure with leverage.”
Performance is all over the map. The Direxion Daily TSLA Bull 1.5X, for instance, had a total one-year return of about 12% through November, but it’s up about 148% year to date through Dec. 15, according to Morningstar.
Not surprisingly, single-stock ETFs that take a bear strategy have seen negative returns of late.
The U.S. Securities and Exchange Commission issued an investor warning in August, reiterating the extra risks inherent to single-stock ETFs.
“Because leveraged single-stock ETFs in particular amplify the effect of price movements of the underlying individual stocks, investors holding these funds will experience even greater volatility and risk than investors who hold the underlying stock itself,” the SEC said.
These vehicles are appropriate for sophisticated retail investors and professionals that are willing to take a short-term view and are willing to monitor their positions daily, said Ed Egilinsky, head of sales and distribution and alternatives at Direxion.
Which stocks could be targeted for the next hotly traded single-stock ETF? Success is determined in part by assets, daily volume, and scale, said Egilinsky. “We’re going to let this play out over time. It’s still in its infancy stages and we’ll continue to look for single stocks that make sense for us to bring to the market.