Traditional ETFs, or Exchange Traded Funds, are designed to let you buy into a one fund and get exposure to many different companies or assets. They mitigate your investing risk. They’re usually safer bets.
For example, each share you of Vanguard’s S&P 500 ETF (“VOO”) tracks the entire S&P 500. They are enormously popular among buy-and-hold investors because your money grows along with the market. And they’ve been around for decades.
July 2022: enter the single-stock ETF
In 2022, a new type of ETF entered the American market: the single-stock ETF. Single-stock ETFs track just one underlying security. Some of the current single-stock ETFs speculate on Apple, Amazon, Coinbase, Google, Microsoft, Nike, NVIDIA, PayPay, Pfizer, and Tesla. Even though they track just one securiy, single-stock ETFs are different from buying just one share of the company.
Leveraged and Inverse
Single-stock ETFs use derivates contracts to leverage or do the inverse of what the underlying stock does. Though leverage can lead to gains, it can also lead to significant losses.
Here is how one commentator described what could happen with a single-stock ETF that uses three times leverage compared to just buying the stock itself:
“Let’s say they both begin at $100. And then let’s say we have a 20% up day followed by two 10% down days, a 20% up a negative 20%, a negative 10%, another 20%. At the end of the day, guess what, the stock is worth $100.78, basically flat. Guess what, the ETF lost 40% of its value.”
Designed to lose over a longer period
Single-stock ETFs also reset daily and have a feature called ‘time decay’ meaning that they naturally will lose value over longer periods—regardless of what the underlying stock does. For this reason, they are meant to be used for short-term trading of just one or a few trading sessions by active traders. They not only can diverge greatly from the underlying stock, they are designed to do just that—especially if the market is volatile.
And as with many alternative investments, they come with high fees as well. Single-stock ETF fees may be more than 1%. Compare that to low-cost mutual funds or ETFs with fees of just 1/10th of that. So even if you can use them successfully, the fees will eat into any profit.
Regulators warn against them
Because of its unusual features, in July 2022, an S.E.C. Commissioner released a statement noting her “worry that these single-stock ETFs pose yet another, perhaps greater, risk for investors and the markets.”
The S.E.C. Commissioner stated:
“It would likely be challenging for an investment professional to recommend such a product to a retail investor while also honoring his or her fiduciary obligations or obligations under Regulation Best Interest.”
Free consultation
There is little reason for your financial advisor to have invested you in single-stock ETFs–and a lot of reasons they shouldn’t. If you’ve had losses with them, contact Wilkowski Law for a free consultation.
