Retail traders just got a new tool to make bigger bets on their favorite stocks, but advisers are warning about outsized risks.
The first single-stock exchange-traded funds earlier this month, providing an easy way to magnify returns or bet against volatile companies like Tesla Inc. and Nvidia Corp. Unlike typical ETFs, which include dozens of stocks or bonds, these new products concentrate on just one security.
At a time when the market is experiencing wild swings and recession risks are growing, single-stock ETFs have the potential to entice amateur investors into speculative trades. US regulators have voiced concerns about the products — which have existed in Europe for years — but ultimately approved their release.
“I don't think most retail investors should touch these things with a ten-foot pole,” said Nate Geraci, president of the ETF Store, an investment adviser. “I could make a case that intelligent investors should steer clear from single stocks altogether, and now we're talking about adding leverage and inverse exposure? In my mind, that's a recipe for disaster.”
Here are the pros and cons of the new products:
The Advantages
Single-stock ETFs use derivatives to deliver, for instance, 1.5 or two times the performance of a company each trading day. Other versions bet against the underlying stock by delivering the inverse of the daily performance — so if the stock falls 5% in a day, the ETF will gain 5%.
AXS Investments has already released eight such funds — including for stocks like PayPal Holdings Inc., Nike Inc. and Pfizer Inc. — and at least 85 more are currently in the works, covering some 37 companies. Bloomberg Intelligence estimates that the category could gather more than $1 billion in assets within a year of launching.
The new products, like ETFs in general, make trading easier. Instead of having to open a margin account at a brokerage, investors can purchase them through their normal trading account alongside more traditional funds that track broader indexes, and it’s simpler than learning the complex world of options trading.
Also, you can’t lose more than your initial investment with these products, unlike normal trading on margin.
The products allow investors to express a bullish or bearish view on a stock in a more convenient way, according to Matthew Tuttle, managing director at AXS Investments.