Are Single-Stock ETFs Foolish?

Do you think Nike is overvalued? Or maybe you think it’s a bargain and that the price will surge.  

You could turn to derivatives such as options, or short-selling to cash in, though it would take time if you don’t have the right account features. Now, you can put on those Nikes and run to take a position with two times leverage betting either for or against the stock.  

AXS Investments has launched its family of eight single-stock ETFs. Matthew Tuttle, AXS Investment’s managing director, told me they had a total of $39.7 million in assets as of July 21, 2022 across these ETFs:  

• AXS TSLA Bear Daily ETF (TSLQ) 

• AXS 1.25X NVDA Bear Daily ETF (NVDS) 

• AXS 1.5X PYPL Bear Daily ETF (PYPS) 

• AXS 1.5X PYPL Bull Daily ETF (PYPT) 

• AXS 2X NKE Bear Daily ETF (NKEQ) 

• AXS 2X NKE Bull Daily ETF (NKEL) 

• AXS 2X PFE Bear Daily ETF (PFES) 

• AXS 2X PFE Bull Daily ETF (PFEL) 

Continuing to use Nike as an example, for a 1.15% annual expense ratio plus the bid/ask spread of a round-trip investment, you can earn twice the daily return of the stock, or the inverse return if you buy the bear version.  

I first wrote about levered and inverse levered ETFs over a decade ago, in which I noted that both the levered ProShares ultra-long and short triple levered S&P 500 fund lost substantially in the same year when the market was flat. ETF’s Sumit Roy explains the math of why this happens (daily rebalancing) in an Exchange Traded Friday’s podcast.  

Roy states these products have been in Europe for a few years, and compares their returns of the single-stock Tesla levered products to the stock itself. Since July 2020, Tesla returned 212%, while the three times Tesla long product gained only 72%, and the inverse three times Tesla product lost 99.99% of its value.  

Now, in fairness to AXS Investments, it explains up front on its website that these are “intended to be used as a short-term trading vehicle for traders and sophisticated investors who understand the risks and benefits of these type of funds.” Tuttle defined short-term as “one day,” though some may choose to hold longer.  

My Take 

While I appreciate the warning that these are not to be used for the long term, I couldn’t disagree more that these are “for sophisticated investors who understand the risks and benefits.” I see huge risks, but no benefits.  

In fact, I don’t even think these products have anything to do with investing, and have everything to do with speculation. I expressed the sentiment that investing is a long-term endeavor to Tuttle, who replied that, for some, it’s about short-term trading, and these ETFs are a tool for those investors’ needs.  

In eight words, my definition of investing is “minimizing expenses and emotions; maximizing diversification and discipline.” These single-stock ETFs are the exact opposite—they are levered, concentrated, expensive products that prey on your emotional conviction of being much smarter than the market in the short term. In fact, to win, you’ll likely have to cover the expenses and the math that’s working against you.  

I thought broad levered ETFs such as the ProShares levered 500 long and inverse ETFs were the worst ETFs that Wall Street could launch; I was clearly wrong. A single-stock ETF will have greater volatility, which translates to more rebalancing resulting in the math working against good performance. I agree with the SEC warning about these ETFs.  

The late Vanguard founder, John C. Bogle, was initially against ETFs, as he feared people would use them as trading vehicles rather than for long-term investing. He softened his view over time and agreed that ETFs can be used as long-term investing. Add in the tax benefits of ETFs over mutual funds, and they can be a great vehicle for investors.  

Yet single-stock ETFs go much further than the stock picking Bogle warned against. Single-stock ETFs may be brilliant for the issuer, but they’re foolish for the investor. You might have better odds buying a winning lottery ticket.

Allan Roth is the founder of Wealth Logic LLC, an hourly based financial planning firm. He is required by law to note that his columns are not meant as specific investment advice. Roth also writes for Barrons, AARP, Advisor Perspectives and Financial Planning magazine. You can reach him at [email protected], or follow him on Twitter at Allan Roth (@Dull_Investing) · Twitter.