It’s been a busy summer on Wall Street, and exchange-traded funds that track the price of individual stocks while using leverage are the Street’s latest invention. Some of these are inverse funds that promise to do the opposite of what the share price of one company is doing.

The buzz around the products is hard to ignore. But how do financial advisors use them?

In July, via a lengthy statement, the Securities and Exchange Commission said in part, “As with other complex exchange-traded products, single-stock ETFs may be useful to certain investors who understand their unique features. However, they are risky products for investors and potentially for the markets as well.”

In a harder line stance, the secretary of the state in Massachusetts, William F. Galvin, warned that there could be investigations into broker-dealers who recommend single-stock ETFs without proper suitability screens. Galvin said, "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."

Despite the regulatory alarms, adherents note that the products are not illegal or evil. The companies that have them in their lineup include established fund families such as AXS Investments, Direxion, F/m Investments and GraniteShares, and they have all gone through the arduous due diligence of developing, registering and launching these products.

Let’s examine four situations where advisors might be able to use single-stock ETFs with clients.

Leverage Without Margin Borrowing
First, these products might be used by investors or traders who want leverage, but without using brokerage margin borrowing.

Rising interest rates have increased borrowing costs. And investors who want to avoid the rising cost of margin debt may opt instead for single-stock ETFs that use daily leverage.

A trader or investor who is bullish on Nike, for instance, might consider using the AXS 2X NKE Bull Daily ETF (NKEL), which seeks daily investment results, before fees and expenses, that correspond to two times (or 200% of) the daily performance of the common shares of Nike Inc.

If advisors can show their clients that the single-stock solution is a more cost effective and lower risk choice than margin borrowing—and if the clients understand the risks—this ETF might be a good fit for them.

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