Tesla dominates US single-stock leveraged and inverse ETFs

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There are 29 leveraged and inverse US single-stock ETFs on the market with a combined $1.3bn in assets, but $1bn of those assets are in seven ETFs that target the performance of Tesla, according to data from FactSet.

Nvidia is the second-most popular company for the single-stock ETFs, with a combined $117mn in three ETFs that track the company. ETFs that track the performance of Alibaba, Alphabet, Amazon, Apple, Coinbase, Meta, Microsoft, Nike, PayPal and Pfizer each have less than $100mn in investor assets.

Five firms, AXS, Direxion, YieldMax, GraniteShares and Innovator ETFs, provide all of the single-stock ETFs currently available, while large asset managers have shied away from such products.

AXS launched the first such products last year on July 13, a day after receiving SEC approval. The firm had filed to launch 18 ETFs that track the performance of Tesla, Salesforce, ConocoPhillips, Boeing, Wells Fargo, Pfizer, Nike, Nvidia and PayPal, but only leveraged and inverse ETFs betting on Tesla, Pfizer, Nike, Nvidia and PayPal have come to market.

AXS still planned to launch the remaining single-stock ETFs, the company told Ignites last month.

The firm recently disclosed that it would shutter five of its eight existing products.

Two days after AXS announced the liquidation, RexShares and YieldMax filed to launch a combined 29 single-security ETFs, some of which will track the performance of other ETFs, rather than companies. And early last month, GraniteShares filed for 32 additional single-stock ETFs.

“Participating issuers right now are trying to figure out the types of single-stock ETFs that will sell — including figuring out what investors are looking for,” said Daniil Shapiro, director of product development at Cerulli Associates. “The securities themselves will likely be the ones investors want to place bets on versus hold for the long term.”

Tesla’s stock had risen more than 140 per cent since the beginning of the year by the close on 21 June, from $108.10 to $259.46.

The recent “breakout” by Nvidia helped both leveraged and inverse Nvidia single-stock ETFs attract assets, noted Bryan Armour, director of passive strategies at Morningstar.

“This may just be throwing spaghetti at the wall by these issuers to see what sticks,” Armour said. “It’s likely that they’re attempting to find stocks where investors have strong opinions and want to gamble on their thesis.”

The current batch of US single-stock ETFs were largely tech-focused, because of the high activity in the sector, noted Rich Lee, head of program trading, ETF trading and execution strategy at Baird. That could change, however, if innovative firms highlighted areas of the market that weren’t being addressed, he added.

Single-stock ETFs can act as something of a proxy for larger sectors, noted GraniteShares founder and chief executive Will Rhind. Investors betting on the Chinese tech industry, for example, might trade Alibaba-focused ETFs, while the recent Nvidia surge had been reflective of growing interest in artificial intelligence, he noted.

Rhind advised against day trading with single-stock ETFs but also noted that they were not “buy-and-hold” products. Instead, investors should actively focus on market fluctuations, he added.

“Shorting securities can subject an investor to a short squeeze including hefty borrowing costs and unlimited liability if the position moves against them, but purchasing a short ETF does not create such a risk [as] the loss is limited to the investment made,” Shapiro said. “Beyond additional leverage offered by some of the products, the shorting element can also become a draw.”

Overall, the borrowing costs to short large-cap stocks was relatively low compared to small-caps, Armour noted, adding that it was unclear whether there would come a point when shorting via an “expensive” single-stock ETF comes at a lower cost than shorting the underlying security.

The largest ETF issuers have steered clear of single-stock ETFs, in part because they run counter to the low-cost, core exposure ETFs that financial advisers were looking for, Shapiro noted. Single-stock ETFs were competing for a smaller market in a risk-oriented environment, but it’s “still possible” that they could be useful to investors as a trading or risk management tool, he added.

“It seems like everyone wants to make sense of these products, but they don’t have much purpose besides short-term gambling,” Armour said.

*Ignites is a news service published by FT Specialist for professionals working in the asset management industry. Trials and subscriptions are available at ignites.com.