Are Single Stock ETFs a Good Idea?

Are Single Stock ETFs a Good Idea?

Are Single Stock ETFs a Good Idea?

They’ve only been on Wall Street since July, but debate is raging over individual exchange-traded funds.

The product offers traders reverse positions on individual securities, despite concerns from SEC Commissioner Caroline Crenshaw.

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“While I have previously raised concerns about leveraged and inverse ETFs, I am concerned that these single-stock ETFs pose another, perhaps greater, risk to investors and the markets due to the increased stock exposure and daily rebalancing,” she said in a 11 July, SEC statement.

“In other words, investors’ returns over an extended period of time could be significantly lower than they would expect based on the performance of the underlying stock,” she added.

SEC

The daily rebalancing of single stock ETFs and the effects of compounding can cause returns to differ significantly from the performance of the single underlying stock. SEC Commissioner Caroline Crenshaw ((Photo by SAUL LOEB/AFP via Getty Images) / Getty Images)

As inflationary pressures propel the US Federal Reserve into another year of interest rate hikes and major Wall Street benchmarks struggle to reverse their downside positions, single-stock ETFs can offer day traders complex exposure to one stock rather than a diversified portfolio.

ticker security Last To change To change %
SP500 S&P500 3915.73 -13.13 -0.33%
Me: DJI DOW JONES AVERAGES 33163.72 -133.24 -0.40%
I: COMP NASDAQ COMPOSITE INDEX 10906.99574 -50.02 -0.46%

Single stock ETFs: A gamble for day traders

In an interview with FOX Business, Trending Stocks CEO John Duffy said, despite his unique views on single stocks, “Single stock ETFs are a bigger gambling method for speculators.”

New York Stock Exchange

Single-stock ETFs will add more leverage to the system – they increase risk in our financial system and can trickle down to the real economy in their ability to destabilize markets.” Derek Horstmeyer, professor of finance at George Mason University. (AP Photo/Mark Lennihan/AP Images)

“The good news is that you dip in and out, so long-term losses don’t come into play and you have your money within 24 hours either as a loss or a win,” he added. “Also, with a single stock ETF for a company like Apple, you can participate at a fraction of the cost of stocks, reducing overall spending and investment.”

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“Market history is full of innovators looking for an edge or a way to attract the gamblers and speculators, and the single-stock ETF is there to attract the speculators,” he concluded.

How do single stock ETFs work?

Dave Mazza, Direxion’s managing director and head of product, told FOX Business that single-stock ETFs magnify tactical views on single stocks with daily 1.5x leverage and 1x inverse exposure, while maintaining bullish and bearish positions at five of the largest and most liquid single stocks in the world.

“Single stock ETFs can be used to meet the diverse needs of traders looking to take a long or short position in a particular stock, while reverse single stock ETFs can be used to express a bearish view of stocks,” he said. “In other words, traders can go long to go short.”

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“However, leveraged ETFs seek daily investment results and should be considered primarily for short-term trading purposes,” he cautioned.

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