Leverage Without Options
For advisors with clients not comfortable using call or put options, leveraged single-stock ETFs could be an attractive alternative.
For example, instead of buying call options on Tesla, a bullish investor could buy the Direxion Daily TSLA Bull 1.5X Shares (TSLL). This fund seeks to provide 150% of the daily exposure to Tesla’s stock. That means on any given trading day, if the electric carmaker gains 1%, the Direxion fund should gain 1.5%. Conversely, if Tesla loses 1%, the ETF should decline by 1.5%.
While a single-stock ETF trading at 1.5 times is certainly an aggressive investment, it’s arguably less so than trading options for the same shares.
Hedges
Next, the funds might lure investors with long positions in individual stocks who want to hedge them with inverse ETFs.
This might be the biggest opportunity for advisors wanting to help potential clients. What if you find a prospect with a boatload of Apple or Tesla shares? Maybe the prospect is a corporate executive or a longtime employee at the company where he or she accrued a lot of stock? How can you help them manage the risk of concentrated wealth?
The obvious answer is to sell stock and diversify the proceeds. And while that advice is sound, many people don’t want to pay the capital gains taxes. Other times they’re psychologically not ready to let go of the shares in their companies—even though they understand that there’s a lot of financial risk associated with concentrated stock positions. How can they be helped? That’s where the inverse single-stock ETFs can play a role in managing the downside risk.
For example, the Direxion Daily AAPL Bear 1X Shares fund (AAPD), which follows Apple, and the Direxion Daily TSLA Bear 1X Shares fund (TSLS), which follows Tesla, could help shareholders of those companies who want to hedge their risk without selling. Any losses in their stock positions would be offset by gains in the corresponding inverse ETFs.
Speculators
The last group of potential single-stock ETF users are traders who want to speculate with the funds. These are probably not the clients most advisors want to focus on. But if investors want to make directional bets on individual companies—bullish or bearish—then single-stock ETFs aren’t the worst choice and might even look better than trading options or borrowing on margin.
Summary
The pool of investors here, in any case, is no bigger than the shareholder bases of the covered companies—and so the pool of investors who will benefit from these funds is even smaller.
But the potential clients also likely don’t know about single-stock ETFs. So who is going to tell them?
While it’s too early to know how large this marketplace will become, it represents a fresh opportunity for enterprising financial advisors.