Single Stock ETFs: Made for September Investing

Modern, leveraged funds like NVDQ allow tactical investors, including this writer, to exploit volatility.

Single stock ETFs are flourishing, gaining in popularity and increasing in number.  

Stock-pickers, be they professional advisors or self-directed investors, have a whole new window of opportunity into attacking, defending and generating that elusive “alpha” that has gone largely missing the past decade.

That last point is ironic since ETFs are much to blame for squeezing the ability of professional investors to earn returns above the S&P 500 index. ETFs that track the broad market have been so successful in attracting assets, the U.S. stock market operates more like a robotic, top-heavy unit, moving largely in sync with greater frequency than in decades past.

But with single-stock ETFs, investors have two new skills to acquire, if they choose to indulge. First, there is the art and science of pursuing the same or greater gains from a stock’s rise in price, while putting less capital at risk. At their core, this is one motivator using “leveraged” ETFs on single stocks. The math can work against the investor very quickly if they don’t pay attention and their leveraged position goes against them.  

That’s why any discussion about the use of these ETFs should be accompanied by the phrase “in the right hands.”  

Single Stock ETF Investing: More Skill than Luck

Of all the types of ETFs that should require a prerequisite education in how they work (beyond just a small print disclaimer in a prospectus!) it is these. As much as any part of the of the ETF landscape, single stock ETFs may be the most even playing field for generating alpha. In other words, skill is more likely to win out, and counting on luck can drain a portfolio, quickly.

Sampling of leveraged ETFs

Source: etf.com

Investors including myself have embraced these to take small positions that can potentially produce strong near-term returns, since single stock levered ETFs gain $125 to $200 per $100 gain in the actual stock, depending on which vehicle we are talking about.

And during periods like the recent one, in which market leaders like Nvidia (NVDA) can fall 15% in a week’s time, without any leverage, the potential gains on inverse ETFs like the $56 million T-Rex 2X Inverse NVIDIA Daily Target ETF (NVDQ) are quite high. High, but also potentially fleeting, since these products are intended for single-day use. In certain markets, their volatility will be contained enough to allow gains to accrue from “being right” about the stock over weeks or even months.  

Inverse ETFs on Market Indexes

This is something we’ve seen with inverse and leveraged ETFs devoted to macro market indicators. For instance, the $940 million ProShares Short S&P 500 ETF (SH) is down about 10% this year, while the S&P 500 is up about 17%. In other words, after all the gyrations of the past eight months, SH has not lost dollar for dollar. It is down only about 60% as much as the S&P 500 it up.  

While the space provided here is too limited to list the many stocks that can now be leveraged or shorted using single stock ETFs. In addition to T-Rex, Direxion and Granite Shares populate the single stock space, along with YieldMax, whose focus is on writing options against many of today’s most popular stocks to earn income from stocks that otherwise don’t yield much. Investors exchange that for giving up much of the upside in those stocks.

These new kids on the ETF block are still evolving, and we’d assume the current list of about 100 of them I found will expand quite significantly, assuming enough investors take to them. And hopefully, put in the effort to understand them before using them.