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The ETF industry has seen rapid progress since their inception. In its initial days, plain vanilla ETFs used to track broad market indices. However, these have grown to cover a wide array of investment themes, sectors and styles over the years.
In this pursuit, one of the latest changes in this space has been the advent of single-stock ETFs. These funds, as the name suggests, focus on a single stock rather than a bunch.
In the past year, single-stock ETFs have made up 7% of the total new U.S. ETF listings, per a J.P. Morgan report. Since July 2022, about 30 single-stock ETFs have been listed in the United States, which have gathered $1.1 billion in total assets.
Inside Single-Stock ETFs
Single-stock ETFs are fundamentally funds that look to track the performance of a single company’s stock. While traditional ETFs follow a basket of multiple stocks or other assets to lower concentration risks, single-stock ETFs bet on a single entity. This basically allows investors to buy shares of an ETF that imitate the performance of an individual company's equity rather than a diversified portfolio.
Pros of Single-Stock ETF Investing
Investors should note that many times some high-priced stocks normally remain unreachable for smaller investors. Single-stock ETFs can make these stocks accessible to all, as ETF shares may be priced lower than the underlying stock.
Secondly, they can provide easier access to certain foreign stocks. For example, investors may find it difficult to buy shares of foreign companies due to regulatory complications. However, an ETF based on a single foreign company's stock, if traded on a domestic exchange, can easily be bought, thereby avoiding these issues.
Then, issuers can offer inverse/leveraged exposure to a single stock when the stock is packed within an ETF. With this structure, investors get the scope to multiply their returns, though with greater risks.
Lastly, when offered in an ETF form, such a single-stock product can offer tax efficiency. Like traditional ETFs, single-stock ETFs can provide tax advantages related to capital gain distributions, depending on jurisdiction and specific circumstances. However, that stock itself will not offer such a benefit.
Cons of Single-Stock ETFs
Despite the benefits, single-stock ETFs come with their shares of risks that investors must be mindful of.
Concentration Risk: The most apparent risk is the company-specific concertation risk. If the single stock that the ETF holds performs poorly, the entire ETF’s performance will be awful. Unlike traditional ETFs, this newbie cannot balance the poor performance of one stock with the better performance of others.
Liquidity Risk: Single-stock ETFs may be less liquid than the underlying stock, especially if they are newly launched or not widely held. This can result in wider bid-ask spreads and snag in buying or selling the ETF at wanted prices.
Tracking Error: Like any ETF, single-stock ETFs may experience tracking error, which is a deviation between the ETF’s performance and the performance of the underlying stock. This could occur due to fees, rebalancing or other factors.
ETFs in Focus
Below we have highlighted a few single-stock ETFs.
(Disclaimer: This article has been written with the assistance of Generative AI. However, the author has reviewed, revised, supplemented, and rewritten parts of this content to ensure its originality and the precision of the incorporated information.)
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Guide to Single-Stock ETF Investing
The ETF industry has seen rapid progress since their inception. In its initial days, plain vanilla ETFs used to track broad market indices. However, these have grown to cover a wide array of investment themes, sectors and styles over the years.
In this pursuit, one of the latest changes in this space has been the advent of single-stock ETFs. These funds, as the name suggests, focus on a single stock rather than a bunch.
In the past year, single-stock ETFs have made up 7% of the total new U.S. ETF listings, per a J.P. Morgan report. Since July 2022, about 30 single-stock ETFs have been listed in the United States, which have gathered $1.1 billion in total assets.
Inside Single-Stock ETFs
Single-stock ETFs are fundamentally funds that look to track the performance of a single company’s stock. While traditional ETFs follow a basket of multiple stocks or other assets to lower concentration risks, single-stock ETFs bet on a single entity. This basically allows investors to buy shares of an ETF that imitate the performance of an individual company's equity rather than a diversified portfolio.
Pros of Single-Stock ETF Investing
Investors should note that many times some high-priced stocks normally remain unreachable for smaller investors. Single-stock ETFs can make these stocks accessible to all, as ETF shares may be priced lower than the underlying stock.
Secondly, they can provide easier access to certain foreign stocks. For example, investors may find it difficult to buy shares of foreign companies due to regulatory complications. However, an ETF based on a single foreign company's stock, if traded on a domestic exchange, can easily be bought, thereby avoiding these issues.
Then, issuers can offer inverse/leveraged exposure to a single stock when the stock is packed within an ETF. With this structure, investors get the scope to multiply their returns, though with greater risks.
Lastly, when offered in an ETF form, such a single-stock product can offer tax efficiency. Like traditional ETFs, single-stock ETFs can provide tax advantages related to capital gain distributions, depending on jurisdiction and specific circumstances. However, that stock itself will not offer such a benefit.
Cons of Single-Stock ETFs
Despite the benefits, single-stock ETFs come with their shares of risks that investors must be mindful of.
Concentration Risk: The most apparent risk is the company-specific concertation risk. If the single stock that the ETF holds performs poorly, the entire ETF’s performance will be awful. Unlike traditional ETFs, this newbie cannot balance the poor performance of one stock with the better performance of others.
Liquidity Risk: Single-stock ETFs may be less liquid than the underlying stock, especially if they are newly launched or not widely held. This can result in wider bid-ask spreads and snag in buying or selling the ETF at wanted prices.
Tracking Error: Like any ETF, single-stock ETFs may experience tracking error, which is a deviation between the ETF’s performance and the performance of the underlying stock. This could occur due to fees, rebalancing or other factors.
ETFs in Focus
Below we have highlighted a few single-stock ETFs.
On Tesla (TSLA):
Direxion Daily TSLA Bull 1.5X Shares ETF (TSLL - Free Report) – $1.17 billion AUM
Direxion Daily TSLA Bear 1X Shares (TSLS - Free Report) – $34.7 million
On Nvidia (NVDA):
Graniteshares NVDA 1.5X Daily ETF (NVDL - Free Report) – $228.1 million
AXS 1.25x NVDA Bear Daily ETF (NVDS - Free Report) – $108.1 million
On Microsoft (MSFT):
Direxion Daily MSFT Bull 1.5X Shares (MSFU - Free Report) – $40.2 million
Direxion Daily MSFT Bear 1X Shares (MSFD - Free Report) – $7.0 million
On Apple (AAPL):
Direxion Daily AAPL Bull 1.5X Shares (AAPU - Free Report) – $40.4 million
Direxion Daily AAPL Bear 1X Shares (AAPD - Free Report) – $29.6 million
On Amazon (AMZN):
Direxion Daily AMZN Bull 1.5X Shares (AMZU - Free Report) – $50.0 million
Direxion Daily AMZN Bear 1X Shares (AMZD - Free Report) – $2.4 million
(Disclaimer: This article has been written with the assistance of Generative AI. However, the author has reviewed, revised, supplemented, and rewritten parts of this content to ensure its originality and the precision of the incorporated information.)