Broker-dealers selling the first single-stock exchange-traded funds in Massachusetts are being investigated by regulators to keep “Main Street investors” safe, state Secretary of the Commonwealth William F. Galvin announced yesterday.
Galvin said in a prepared statement that he has directed his Securities Division to initiate a "sweep" of Massachusetts-registered broker-dealers selling “complex” single stock ETFs to retail investors to ensure that the products aren't unsuitable.
Single-stock ETFs, which track the performance of one particular stock, are built to magnify gains and losses, generating larger outcomes from a single position, as opposed to following an index or basket of stocks. The additional risks in the form of increased leverage and exposure to concentrated volatility mean they “may not be a suitable offering for most Main Street investors,” Galvin said.
“These are risky products, investing in only one stock, with no diversity cushion whatsoever. For nearly all Main Street investors, there is no difference between investing your money in single-stock ETFs and gambling with that money at a casino. Under no circumstances should an investor use these products as a long-term investment,” Galvin said.
While single-stock ETFs may be suitable for day traders, most retail investors would be better off investing their savings in long-term holdings, he added.
The Massachusetts Securities Division sent inquiry letters yesterday to Foreside Fund Services, IMST Distributors, ALPS Distributors and Quasar Distributors. The entities receiving the inquiry letters are registered broker-dealers in the state that distribute the AXS Investment, Direxion, F/m Investments and GraniteShares product lines, respectively.
The Securities Division has requested responses to the inquiry letters no later than September 1.
The SEC approved single-stock ETFs in July and the first of eight such funds was introduced by AXS Investments.
SEC Commissioner Caroline Crenshaw said after the approval that single-stock ETFs posed “perhaps greater risk” for investors than leveraged and inverse ETFs and stated it would be hard for advisors to recommend such products while meeting their Reg BI obligations.
“Because of the features of these products and their associated risks, it would likely be challenging for an investment professional to recommend such a product to a retail investor while also honoring his or her fiduciary obligations or obligations under Regulation Best Interest,” Crenshaw added.