The case of single-stock ETFs

With a wave of single-stock ETFs hitting the market this summer, more companies are expanding their product lines to include funds that focus on the day-to-day activity of a particular security.

“These are tools that are really meant to be used as a tactical trading vehicle,” said Dave Mazza, managing director and product manager at Direxion. Bob Pisani in an interview on CNBC “ETF Edge“On Monday.

“Specifically, someone who has the ability and interest to monitor their positions on a daily basis,” he added.

Direxion last week launched the first four of its leveraged and inverse single-stock ETFs that allow traders to gain magnified or inverted exposure to the daily performance of Apple and Tesla. The TSLA Bear 1X Daily Stocks (TSLS), TSLA Bull 1.5x Daily Equity ETF (TSLL), 1.5x daily AAPL bull (AAPU) and 1x Daily AAPL Bear (AAPD).

There are currently single-stock ETFs for You’re here, Apple, Coinbase, Nike, Pfizer, PayPal and Nvidia, allowing investors to be both leveraged long and bet short against individual stocks. Tesla in particular has sparked interest, with five single-stock products.

“There was a regulatory rule change over the last two years that allowed this to happen,” Will Rhind, CEO of GraniteShares, said on “ETF Edge” on Monday.

“We’ve had leveraged products on broad indices like QQQs, we’ve had leveraged commodity ETFs which have been very popular,” he said. “And now individual stocks are the next generation in this category.”

GraniteShares also announced last week its suite of short-term and leveraged exchange-traded funds: the 1.25x Daily Long Tesla ETF (TSL), 1x TSLA Daily Short ETF (TSLI), 1.75x AAPL Daily Long (AAPB) and 1.5x Coinbase Daily Long (CONL).

As single-stock product launches accelerate, SEC Chairman Gary Gensler has previously raised concerns about ETFs. In a speech in May, he said such funds “can present unique and potentially significant risks to investors in all market sectors.”

“There are some proposals in the chart to limit exposure to the retail community of complex ETFs,” Reggie Brown, head of GTS, said on “ETF Edge” on Monday. “I think it’s a giant mistake.”

Brown explained that the concept of a single-stock ETF is not a new idea, but was first proposed in 2009 when low-priced corporate stocks were trading as a teenager. And some institutional investors couldn’t hold low-priced securities.

“It serves a purpose,” he said. “I think this type of ETF has the ability to hold a thousand different company stocks and bring innovation to the market. That’s a good thing.”

Mazza added that the brokers have rules in place to clarify that the products are intended to be used as trading vehicles, such as an aggressive trading profile.

“Instead of limiting access, we believe we need to promote education and the usefulness of how these products can be used,” Mazza said. “But also, there may be a need – especially in times of heightened volatility – for those who are interested and those who understand the inherent risk to express views and amplify their exposure on a daily basis.”

Volumes of leveraged and inverse ETFs have soared since the onset of the pandemic, and demand has held steady in 2022. Increased trading volume of leveraged and inverse ETFs such as SQQQ and its opposite TQQQ led Nasdaq-indexed ETFs to exceed S&P500 in the second quarter of 2022.

“During Covid, we’ve had more engagement from new retail investors in the market,” Brown said. “And as they understood more of the products that were available to them to express their views, we saw an explosion in trading from a day trading perspective.”

Brown said there are likely investors who have magnified returns, with daily returns between 4% and 10%. It comes down to vendors like Direxion and GraniteShares responding to demand, he said.

“There are institutions that want to use these products, and there’s a strong demand for them,” Brown said. “If you look at high-priced stocks like Tesla, there’s a lot of day trading in those company stocks and having them in an ETF provides leverage. It just fills a need.”

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