New Innovations: Single Stock and BuyWrite Bond ETFs
by Charles Rotblut | September 01, 2022
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The financial industry continues to show creativity in the types of products it launches. The latest examples are two different types of exchange-traded products: single-stock exchange-traded funds (ETFs) and BuyWrite bond ETFs. I’m going to explain what both are and point out potential risks you should be aware of.
Single-stock ETFs are designed to track the performance of a single stock. This is in sharp contrast to what ETFs, mutual funds and closed-end funds have traditionally done—provided exposure to several different stocks and other securities.
Why would you want to buy an ETF when you could just by the stock outright? It’s a very good question. It’s certainly one you should ask yourself before considering a single-stock ETF.
GraniteShares’ single-stock ETFs offer long leveraged and short exposure to Tesla Inc. 
(TSLA) and long leveraged exposure to Apple Inc. (AAPL) and Coinbase Global Inc. (COIN), respectively. Direxion offers long leveraged and short exposure to Apple and Tesla. AXS Investments offers long leveraged and short exposure to Tesla, Nvidia Corp. (NVDA), PayPal Holdings Inc. (PYPL), Nike Inc. (NKE) and Pfizer Inc. (PFE).
All of them give you the chance to either realize additional daily gains or profit from a daily decline in the stock’s price. The pitch is that you can do so without having to use a margin account.
The catch is that you will likely realize a different return than if you just bought or sold the stocks short directly instead of using those ETFs. These ETFs are designed to track the daily return of the underlying stock. Over time, the focus on tracking daily returns results in a disconnect between the returns of leveraged ETFs for periods longer than a day and the returns of the underlying stocks they target.
Then there are the fees. AXS Investments and GraniteShares are charging expense ratios of 1.15%, while Direxion is charging 0.99%. These are hefty expense ratios for an ETF.
A bigger concern is volume. The high level of trading volume in Apple, Tesla or the other aforementioned stocks makes it easy to quickly buy and sell them at or very close to quoted prices. This is not the case with these single-stock ETFs.
Yesterday (Wednesday), almost 52 million shares of Tesla were traded. Just 11,400 shares of GraniteShares 2x Long Tesla Daily (TSL) exchanged hands—a very small amount. Direxion Daily AAPL Bull 1.5X (AAPU) had an unusual spike in volume to 111,800 shares yesterday, but this was only the fourth time that daily volume has exceeded 30,000 shares.
Volume in the other single-stock ETFs isn’t generally much better, and that’s a real risk to consider.
Putting it all together, single-stock ETFs require you to make a directional bet on a stock, get your timing right and then pay a high expense ratio for the privilege of doing so. On top of that, should the underlying stock for one of these ETFs make a big move in the opposite direction of the ETF (e.g., a big rise in the stock for an inverse single-stock ETF), there will be a mad dash for the exit doors. Those doors are very narrow given the current level of trading volume. Put another way, good luck getting out quickly and at a price you’d like.
BuyWrite ETFs Are Hybrid Bond Funds
BlackRock is going down a different path with its BuyWrite ETFs. These combine traditional bond ETFs with covered calls.
The three ETFs will hold portfolios consisting of the iShares 20+ Year Treasury Bond ETF (TLT), the iShares iBoxx $ High Yield Corporate Bond ETF (HYG) and the iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD). They will then write (sell) one-month covered call options on the underlying ETFs to generate income.
My immediate thought when I saw the press release announcing these funds was, “What about the taxes?” This type of strategy has the potential to surprise shareholders with larger-than-expected taxable distributions each year.
Besides, you could simply buy the underlying ETFs and write the covered call contracts yourself. You would need to own blocks of 100 shares to fully match your shares to the covered call contracts. But, by doing so, you would have control over decisions about when to close out a contract and when to let it expire.
Then there is the allocation issue. A primary reason for owning bond funds is to provide a ballast against your equity holdings. The BuyWrite strategy mixes an equity-like component—call option—with bonds.
While BlackRock’s BuyWrite ETFs may have some appeal to advisers and certain investment managers who don’t want to deal with options, the single-stock ETFs are trading products looking for speculators.
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AAII Sentiment Survey
The results from the latest AAII Sentiment Survey show optimism about the short-term direction of the stock market falling to an eight-week low. At the same time, pessimism rose to an eight-week high.
Bullish sentiment, expectations that stock prices will rise over the next six months, dropped 5.8 percentage points to 21.9%. The pullback puts optimism back at an unusually low level. It also keeps bullish sentiment below its historical average of 38.0% for the 41st consecutive week.
Neutral sentiment, expectations that stock prices will stay essentially unchanged over the next six months, decreased 2.2 percentage points to 27.7%. Neutral sentiment is below its historical average of 31.5% for the 17th time in 19 weeks.
Bearish sentiment, expectations that stock prices will fall over the next six months, jumped 8.0 percentage points to 50.4%. Bearish sentiment is above its historical average of 30.5% for the 40th time out of the past 41 weeks and is at an unusually high level for the 25th time out of the last 33 weeks. The breakpoint between typical and unusually high readings is currently 40.5%.
The bull-bear spread (bullish minus bearish sentiment) is –28.5% and is unusually low for the 26th time in 32 weeks. The breakpoint between typical and unusually low readings is currently –10.9%. The bull-bear spread has also tied its second-longest streak of negative readings as sentiment has remained in favor of bears for the 22nd week in a row.
Historically, the S&P 500 index has gone on to realize above-average and above-median returns during the six- and 12-month periods following unusually low readings for the bull-bear spread.
Continued volatility in the major stock indexes along with inflation, corporate earnings and increased chatter about the possibility of a recession are all likely weighing on individual investors’ short-term expectations for the stock market. Also influencing sentiment are monetary policy, politics and the ongoing invasion of Ukraine by Russia.
Bullish: 21.9%, down 5.8 points
Neutral: 27.7%, down 2.2 points
Bearish: 50.4%, up 8.0 points
Bullish: 38.0%
Neutral: 31.5%
Bearish: 30.5%
See more Sentiment Survey results.
AAII Asset Allocation Survey
Cash allocations declined in August, while fixed-income and equity allocations both increased slightly. The August AAII Asset Allocation Survey shows fixed-income allocations rising to their highest level in six months.
Stock and stock fund allocations increased by 0.5 percentage points to 64.5%. This increase keeps equity allocations above their historical average of 61.5% for the 27th consecutive month.
Bond and bond fund allocations increased by 0.7 percentage points to 14.4%. Bond and bond fund allocations are also below their historical average of 16.0% for the 18th consecutive month.
Cash allocations decreased by 1.1 percentage points to 21.2%. August was the 28th consecutive month that cash allocations have been below their historical average of 22.5%.
Optimism among individual investors about the short-term direction of the stock market in our weekly Sentiment Survey improved during the first half the month before pulling back during the second half. Bond yields rebounded off the summer low and potentially attracted yield-seeking investors.
It is worth noting that sentiment does not always result in altered allocations as many AAII members follow a long-term approach to investing.
- Stocks and Stock Funds: 64.5%, up 0.5 percentage points
- Bonds and Bond Funds: 14.4%, up 0.6 percentage points
- Cash: 21.2%, down 1.1 percentage points
- Stocks: 30.4%, down 0.7 percentage points
- Stocks Funds: 34.1%, up 1.2 percentage points
- Bonds: 3.0%, down 0.4 percentage points
- Bond Funds: 11.4%, up 1.0 percentage points
- Stocks/Stock Funds: 61.5%
- Bonds/Bond Funds: 16.0%
- Cash: 22.5%
Take the Asset Allocation Survey.
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Discussion
Barry from TX posted over 3 years ago:
UPDATED: Charles, thanks for this critical market update. I have been re-reading Jeremy Siegel's "Stocks for the Long Run." New chapters in the 5th Edition lay out the details of the timeline, the players and the causes that led to the 2008 crash. Alongside the basic story line, he retraces how "exotic" offerings changed the ability to manage volatility in the stock markets and ancillary markets (esp. the housing market) to the extent that the most experienced players ignored behavioral biases - disbelief that a large group of people could be wrong, overconfident in their own abilities, believes he or she is better than average, mental accounting or narrow framing among others -- and chased very risky opportunities at their own peril.
vic smyth from illinois posted over 3 years ago:
It has been my experience with buy-write strategies that you get all of the downside and little of the upside of the underlying security, only generating a little more income if the underlying security sits still. And the bid-ask spreads even on actively traded options on ETFs like TLT are horribly wide. And trying to time the entry and exit points of an option you not only have to try to time the price of the underlying security, but you have to take in consideration the volatility of the option as well. Instead of trying to juggle two balls, you're trying to juggle three.
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