ETF Edge

Watch out for single-stock risk as Chinese equities slide, Tesla soars: ETF manager

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Semiconductors, Japan and Tesla ETFs see high volume in 2020

Steer clear of single stocks for now.

U.S. investors may want to heed that advice from John Davi, founder and chief investment officer of Astoria Portfolio Advisors, who told buyers on Wednesday to be careful when deploying their strategies amid uncertainty around the coronavirus's impact on global markets and the surge in speculative stocks like Tesla and Virgin Galactic.

"You've got to watch single-name stocks that now have supply chains in China because they're going to start to produce more guidance lower," like Apple did earlier this week, Davi told CNBC's "ETF Edge."

With a host of China-based exchange-traded funds down as much as 8% due to coronavirus fears but European and U.S. funds still holding up, Davi said he anticipated more weakness seeping into Western markets as the outbreak progresses.

"I think that the impact is going to spread to Europe and the U.S.," the portfolio manager said.

As such, it's important to be diversified, Davi said, especially considering Wall Street's seemingly linear focus on skyrocketing stocks like Tesla and Virgin Galactic, both of which have already notched triple-digit gains for 2020. Tesla climbed nearly 7% in Wednesday's trading session while Virgin Galactic gained a whopping 23%.

"I would encourage investors to have more of a globally diversified way to play thematics as opposed to picking individual stocks," Davi said.

He referenced Global X's Lithium & Battery ETF (LIT), which invests in lithium producers and electric-car makers that use the chemical in their battery parts. Tesla is LIT's No. 3 holding and accounts for 11% of the ETF.

"Some people are using LIT as a way to kind of play the Tesla story in an exchange-traded, diversified wrapper," Davi said. "It's a risk management issue: putting all your eggs in Tesla versus a diversified basket."

All in all, the outsized volume in speculative stocks and in groups like semiconductors, Japanese equities and other global markets "translates into uncertainty," Tom Lydon, CEO of ETF Trends, said in the same "ETF Edge" interview.

"There's been people taking both sides of the trade" as investors wait for definitive answers on how big of an economic risk the coronavirus could be, Lydon said. "A lot of people are scared."

"Look at Japan. Again, not good economic numbers, higher taxes in the last quarter for sure, and then we've got the Olympics coming up," Lydon said. "The Olympic committee's going to have to come forward and say: are they going to move forward on this based on the coronavirus? That's up in the air."

For now, staying diversified seems to be the safest hedge.

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