Single Stock & Bond ETFs: What Are They & Should You Consider Buying Them
These ETFs, such as the ones based on Tesla, could hold some intrigue for short-term traders.
While ETFs are known as a great way to get broad diversification in your portfolio at rock bottom prices, the latest industry trend goes decidedly in the opposite direction.
ETFs targeting just a single stock have become all the rage lately. As I write this, 20 such ETFs have been launched in just the past two months with the potential for hundreds more coming down the line.
The obvious question may be “why would somebody invest in a single stock ETF when they can just buy the stock?” The answer is that they layer something on top of the single stock exposure. Some use an inverse strategy and the short the underlying stock. Others provide leveraged exposure. At least one uses a “hedged” strategy that adds options to limit the potential range of returns, much like the buffer ETFs that are already out there.
The SEC has gone on record with their concerns about the potential risks of single stock ETFs. In my opinion, it’s tough to argue why the SEC should reject them when it’s already approved a slew of triple-leveraged oil ETFs and other products. They have, however, limited the leverage that is being used in these ETFs. You won’t find any triple-leveraged funds here. The most we’ve seen so far is 2x exposure on Pfizer and Nike, but we’ll see if that changes down the road.
For the record, I don’t think there’s a market for these outside of short-term traders. Longer-term investors probably don’t need them since the expense ratios and the cost of leverage and need to roll over derivatives exposure on a daily basis could negate a lot of the upside of the leverage in the first place. But there are always folks who want to add a little juice to a short-term trade and these could be ideal for that purpose.
Let’s break down where we stand today with the list of available single stock ETFs.
Leveraged Single Stock ETFs
AXS 1.5X PYPL Bull Daily ETF (PYPT)
AXS 2X NKE Bull Daily ETF (NKEL)
AXS 2X PFE Bull Daily ETF (PFEL)
GraniteShares 1.25X Long Tesla Daily ETF (TSL)
GraniteShares 1.5X Long Coinbase Daily ETF (CONL)
GraniteShares 1.75X Long AAPL Daily ETF (AAPB)
Direxion Daily TSLA Bull 1.5X Shares ETF (TSLL)
Direxion Daily AAPL Bull 1.5X Shares ETF (AAPU)
So far, interest in these ETFs has been minor at best. TSLL is the largest of the group, but it’s gained only $7 million in assets. Most are still just starting off with $1-2 million. Even the 1.5X Coinbase ETF hasn’t really gotten any traction, which I find a little surprising. The stock itself has had a rough go of it lately, so I imagine that could perhaps make investors a little gun-shy. It’s still very early on and some of these ETFs are only a week old. It’s too early to draw any conclusions and these may take off yet.
You can see the relative comfort level of the SEC in approving these ETFs based on the amount of leverage allowed. Nike and Pfizer are more established blue chip names and, therefore, got a higher degree of leverage for NKEL and PFEL. Apple and PayPal being slightly more volatile tech names got a little less. I’m a little surprised that CONL and TSSL got approved for 1.5X exposure given how volatile they are. The expense ratios on the Direxion and GraniteShares ETFs are 0.97% and 1.15%, respectively, so these products are not necessarily cheap to own and hold.
Inverse Single Stock ETFs
AXS 1.5X PYPL Bear Daily ETF (PYPS)
AXS 2X NKE Bear Daily ETF (NKEQ)
AXS 2X PFE Bear Daily ETF (PFES)
AXS TSLA Bear Daily ETF (TSLQ)
AXS 1.25X NVDA Bear Daily ETF (NVDS)
GraniteShares 1X Short Tesla Daily ETF (TSLI)
Direxion Daily TSLA Bear 1X Shares ETF (TSLS)
Direxion Daily AAPL Bear 1X Shares ETF (AAPD)
Most of the long ETFs listed above have short counterparts. AXS opted for short-only versions of their Tesla and NVIDIA ETFs. TSLQ, TSLI and TSLS are essentially identical in their exposures. NVDS has just a little bit of short leverage to provide some extra downside. The AXS funds are really the only ones that offer more meaningful leverage on the inverse side.
Hedged Single Stock ETFs
Innovator Hedged TSLA Strategy ETF (TSLH)
As mentioned earlier, TSLH is the more unique ETF of the group in that it combines an options strategy on top of Tesla to put a cap on gains and a floor on returns. On a quarterly basis, the cap on positive returns is 9.29% with the floor on losses set at 10%. Tesla can obviously have swings like that on a daily basis, but for people who want to take a swing at owning Tesla but also protect themselves from severe losses, this could be an option.
The buffer ETFs (also offered by Innovator among others) have built up more than $16 billion in assets, so there’s definitely a market for these products. We’ll see if the buffer ETF concept for indexes translates over to a similar strategy for single stocks, but there’s reason to think it might.
Single Bond ETFs
U.S. Treasury 3 Month Bill ETF (TBIL)
U.S. Treasury 2 Year Note ETF (UTWO)
U.S. Treasury 10 Year Note ETF (UTEN)
These ETFs I find really interesting. Whereas a lot of fixed income funds hold potentially thousands of different bonds, these hold one single bond - the latest issue of U.S. government bonds at these maturities. It’s as close as you’ll get to owning the actual bond without actually owning it.
The benefit of these, using UTEN as an example, is that they will own the most recent 10-year note, but then roll it over into the newest 10-year note when it’s issued. You’re essentially getting consistent 10-year note exposure. If you buy an individual government bond, the remaining maturity changes over time as does its interest rate risk. These ETFs will maintain ongoing exposure to the newest issued bonds and shareholders won’t have to do a thing.
Each comes with an expense ratio of 0.15%, so they’re relatively cheap to own as well. Investors have already responded positively with TBIL and UTEN already having more than $20 million in assets each.
Conclusion
I can see two things happening with single stock ETFs - 1) dozens, if not hundreds, of these ETFs could eventually be launched and 2) most of them will gain almost no interest. The only ones that are likely going to be winners in terms of assets are going to be the ones based on “buzzy” stocks, such as Tesla or Netflix or Twitter or some of the FAAMG names. Anything else is probably going to be DOA. Is anybody really looking for leveraged exposure on Pfizer in an ETF?
I see single stock ETFs going in four directions - leveraged, inverse, buffer and covered calls. The first three have been launched already. The fourth one has yet to debut, but I think it’s coming. An ETF that owns Microsoft, for example, and writes calls based on Microsoft stock I think could be an interesting strategy. High yield investors could be intrigued with capturing a 5%+ yield with equity exposure much like they have with other covered call ETFs.
In short, I think these are certainly unique and probably fill a gap or some investors, but not many. These will be for traders, but longer-term investors probably won’t have much use for them. I think a lot of these could eventually be closed due to lack of interest. It’s only been two months and we’ve already got 6 ETFs based on Tesla. Not all of them are going to survive and this space could get watered down quickly.
Note: I won’t have the ETF tables this week. My laptop got corrupted and I’m working with an old Chromebook that doesn’t quite have the same data capabilities. They should be back next week.
Dave, thanks for the interesting and helpful article!
In reading through it, I can see why the single-bond ETFs appear to have gained some traction. The concept seems interesting and the costs appear reasonable.