Single-stock exchange-traded funds (ETFs) are a new type of investment product available to U.S. investors as of July 2022. Nominally, the concept is simple. These are ETFs that focus on a single stock. This is in sharp contrast to what typically is a mutual fund or ETF’s benchmark: an index that tracks multiple underlying assets representing a sector, industry or asset class/asset class category.

What makes these new ETFs complex are their active management strategies, which seek to achieve a certain multiple of the return of their benchmark stock for a single trading day—for example, a return that is two times better than the benchmark stock. The strategies employ swap agreements—the exchange of financial instruments, such as derivatives or cash flows—to hit their targets.

In theory, the strategies are similar to other alternative mutual funds and ETFs that employ leverage for short-term tracking of a specific target. However, single-stock ETFs carry unique risks and are only meant for sophisticated investors (active traders), not an investor looking to pursue a long-term buy-and-hold strategy. In fact, shares of these ETFs aren’t designed to be held longer than a day.

Who Is Behind These Funds?

Table 1 lists the single-stock ETFs available in the U.S. as of October 2022 and some relevant data fields. To be fair, there isn’t a lot of data on these ETFs because of their recent nascency.

This makes the set of usable data fields quite small. For instance, the longest period of recorded return for any of these funds is one month, as of this article’s publication. The information that is available is more descriptive in nature.

The last column in the table provides each ETF’s fund family. The 23 single-stock ETFs shown are offered by four fund managers: AXS Investments, Direxion Funds, GraniteShares and Innovator ETFs. Direxion offers the most single-stock ETFs (10) followed by AXS Investments (eight), GraniteShares (four) and Innovator (one).

Download the Excel spreadsheet of this table.

Part of the impetus behind bringing single-stock ETFs to the U.S. was the new way individual investors started trading stocks during the early period of the coronavirus pandemic in 2020. The craze surrounding a single meme stock or moves on mega-cap stocks drew the attention of GraniteShares, according to an interview with GraniteShares CEO Will Rhind by NerdWallet.

However, the function of single-stock ETFs in reality is different from their cultural basis. Prospectuses for these funds all reiterate that they are intended only for active traders with a thorough understanding of how the ETFs function as a day-trading tool.

A look at the total assets and average daily trading volume fields in Table 1 highlights the difference between the marketing of a new product and the reality of its use. Single-stock ETFs have attracted very little actual assets as of yet, and only those involving Tesla Inc. (TSLA) have attracted much trading volume.

Being active funds, single-stock ETFs are also quite expensive compared to passive index ETFs. This is another reason single-stock ETFs aren’t meant to be held over a long period of time—their cost would greatly eat into potential returns.

Types of Single-Stock ETFs

The single-stock ETFs in Table 1 fall into three of Morningstar’s ETF categories: inverse equity trading, leveraged equity trading and options trading.

However, it is important to pay attention to the nuances of each ETF because the categories are general in nature. For example, some of the inverse equity ETFs are also leveraged. This is why categories are not included in Table 1, but the table does note whether the ETF is a leveraged and/or an inverse fund.

The last ETF in the table, Innovator Hedged TSLA Strategy (TSLH), is neither a leveraged nor an inverse fund. It belongs to the options trading category and is the only ETF with that category in the table.

Leveraged equity trading ETFs seek to generate returns equal to a fixed multiple of the short-term returns of an equity benchmark, typically an index. Inverse equity trading ETFs seek to generate returns in the same way but equal to an inverse fixed multiple of short-term returns of their benchmark.

Both leveraged and inverse equity trading ETFs are unlikely to deliver their set multiple return of the benchmark’s return over periods longer than one day. Due to daily rebalancing of the portfolios, the compounded returns of these strategies will veer from the performance of the benchmark stock—as is the case with other ETFs seeking to provide extra performance based on a broader index. Again, these funds are not considered suitable for long-term investors because of these characteristics and are designed for use by active traders.

Options trading, or options-based, ETFs feature the use of options as the central component in their investment strategies, which may introduce asymmetric return characteristics to the fund.

An option contract gives the purchaser of the option the right to buy (for a call option) or sell (for a put option) the underlying asset at a specified price on a specified date (the expiration date).

Innovator Hedged TSLA Strategy’s options portfolio follows a call option spread strategy that involves the purchase and sale of call flexible exchange (FLEX) options that reference Tesla with rotating expiration dates of approximately three months. (The FLEX options are customizable options contracts that are exercisable at the strike price only on the expiration date.) Overall, the ETF’s objective is to provide a floor against losses in Tesla stock.

Leveraged and Inverse Strategies

Outside of Innovator Hedged TSLA Strategy with the objective to provide a hedge against Tesla stock, the remainder of the ETFs in Table 1 belong to three fund families, AXS Investments, Direxion and GraniteShares. Between the three there are 11 bear (short) ETFs and 11 bull (long) ETFs.

The majority of single-stock ETFs are focused on companies within the technology sector. In principle, the stocks chosen for these funds are heavily traded and are widely recognized, which gives investors an opportunity to make short-term bets on changing market information.

Tesla is the most frequently followed stock for these single-stock ETFs, with three bear strategies and two bull strategies. Apple Inc. (AAPL) is the second-most frequent, with two bull strategies and one bear strategy. Overall, 10 stocks comprise the single-stock focus of the 23 ETFs in Table 1.

Compared to the other two fund families, AXS Investments offers a unique set of ETFs in terms of which stock is followed. Neither Direxion nor GraniteShares offers an ETF that tracks semiconductor manufacturer Nvidia Corp. (NVDA), athletic footwear and apparel maker Nike Inc. (NKE), pharmaceutical manufacturer Pfizer Inc. (PFE) or financial online services provider PayPal Holdings Inc. (PYPL). For each of these, excluding Nvidia, AXS Investments offers both a bear strategy and a bull strategy. For Nvidia, AXS Investments only offers a 1.25x bear strategy.

Direxion offers a symmetric set of single-stock ETFs, one bear and one bull strategy for each stock. All of the stocks that Direxion’s ETFs focus on fall within the technology sector, with the exception of Amazon.com Inc. (AMZN), which is technically in the consumer cyclicals sector despite its web-services business. Direxion has launched two waves of single-stock ETFs, with its most recent funds yet to record one-month returns.

GraniteShares fits within the AXS Investments and Direxion trends by offering Tesla bear and bull strategies and an Apple bull strategy. However, the fund manager has one unique single-stock ETF following the publicly traded cryptocurrency broker Coinbase Global Inc. (COIN). Coinbase is an interesting choice because it has the lowest market cap of the 10 stocks followed by the ETFs in Table 1. However, the stock’s volatility runs with cryptocurrencies’ fortunes, so there is potential for active trader interest.

Be Cautious About Buying a Single-Stock ETF

Single-stock ETFs are much riskier than holding the underlying stock, a traditional ETF or a non-single-stock leveraged or inverse ETF, according to the U.S. Securities and Exchange Commission (SEC). We agree. Beyond the use of leverage and the divergence of returns if these ETFs are held for longer than day, the low level of trading volume can make it difficult to buy and sell a single-stock ETF at the currently quoted price. Should the underlying stock make a big daily move, the ability to buy or sell these ETFs could be diminished even further. Additionally, it is important to keep in mind that single-stock ETFs provide no diversification benefits.

These ETFs are purely speculative instruments whose performance goals are designed around a single day of trading. Single-stock ETFs aren’t designed for the majority of individual investors, and there is little to no reason that they should have much bearing on your long-term investment strategy.

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