“These are for experienced retail traders, not just someone who likes to dabble from time to time and doesn't understand,” he said. “But for the more experienced retail traders, it’s a great product.”
The Risks
US regulators have expressed concerns about single-stock ETFs. Securities and Exchange Commission Chair Gary Gensler has said the new products “present particular risk,” while Commissioner Caroline Crenshaw noted that “investors’ returns over a longer period of time might be significantly lower than they would expect based on the performance of the underlying stock,” especially in volatile markets.
That’s because they rebalance daily, so a decline one day means the ETF is rising off a lower base the next. Take the ProShares Short S&P500 (ticker SH), which aims to achieve daily returns that are the inverse of the S&P 500 Index. The S&P 500 is down 10% over the past year, meaning you’d expect SH to be up 10%, but in reality its gain is only about 5%.
Despite these objections, SEC rule changes in 2019 and 2020 have allowed leveraged and inverse ETFs to launch more easily, paving the way for single-stock products.
They’re also more costly for investors. The AXS TSLA Bear Daily (TSLQ), which returns the inverse of Tesla’s daily performance and has already attracted more than $38 million from investors, charges an expense ratio of 1.15%. By comparison, the average fee for actively managed ETFs is around 0.70%.
Leveraged ETFs have long been favorites of retail traders, particularly the ProShares UltraPro QQQ (TQQQ), which delivers three times the daily performance of the Nasdaq 100. Yet until now, they have all tracked indexes, which tend to be less volatile than individual companies.
“There are some legitimate use cases for these products, but these things are definitely going to be most used by the traders and gamblers, the Reddit community,” said James Seyffart, ETF analyst for Bloomberg Intelligence.
Ross Mayfield, an investment strategy analyst at Baird, said he wouldn’t recommend these to a client, especially one trying to build long-term wealth.
“There will always be a trader class that this is for,” he said. “The problem is that it’s accessible to all.”