A wave of single stock and leveraged ETFs is coming — assessing the risks and opportunities

Published Wed, Aug 10 20228:35 AM EDTUpdated Wed, Aug 10 202211:32 AM EDT

Single stock ETFs are here, and some people are not happy. A new spate of ETFs around single stocks has launched this week. These ETFs provide leveraged bets for and against individual companies. It's the start of a wave of leveraged and inverse single stock ETFs that could eventually number in the hundreds, and it's already attracting the attention of the SEC. People seem to want to bet with — and against — Tesla Tesla is the company that has attracted the largest interest of the first round of these single-stock ETFs. Already, there are five leveraged and inverse Tesla ETFs, which provide a variety of leveraged upside and inverse returns to the stock on a daily basis. The most successful so far has been the AXS TSLA Bear Daily ETF (TSLQ) , which provides 1.25x inverse exposure to Tesla. So if Tesla is down 1% on a daily basis, this ETF will be up 1.25%. There's two big caveats here. First, this return is only on a daily basis. It resets at the end of every day. So after a month, your return could be significantly different, because of the daily reset. The other caveat is the return is less fees and expenses. These are not cheap ETFs. The expense ratio for NVDS is 1.15%. Regardless, since its inception on July 14 it has averaged 1.2 million shares a day, a respectable amount of trading for a new ETF. On Tuesday, four new leveraged and inverse Tesla ETFs were launched: the Direxion Daily TSLA Bear 1X shares (TSLS) , the Direxion Daily TSLA Bull 1.5x Shares ETF (TSLL) , the GraniteShares 1.25x Long Tesla Daily ETF (TSL) and the GranitShares 1x Short TSLA Daily ETF (TSLI) . Other single-stock ETFs have also recently been launched that provide upside and downside exposure to Nike, Pfizer, Paypal and NVIDIA. Volumes in these ETFs have been modest, however. Leveraged and inverse ETFs are not new While most of the nearly $7 trillion in U.S. ETFs are in funds that track indexes like the S & P 500, the Russell 2000, and the Nasdaq 100, ETFs that provide leveraged and inverse exposure to broad stock indexes have been around for many years. For example, the ProShares UltraPro QQQ (TQQQ) , which provides 3x the exposure to the Nasdaq 100 (if the Nasdaq 100 was up 1% it would be up 3% on a daily basis) has been around since 2010. The ProShares Short S & P 500 (SH) , which provides 1x inverse exposure to the S & P 500, has been around since 2006. However, trading in leverage and inverse ETFs around the tech sector took off during Covid. Trading in ETFs around the Nasdaq 100, for example, saw big jumps in volume in the early days of the Covid crisis, including the 'TQQQ' and the ProShares Short QQQ (PSQ) . So did trading in leveraged and inverse ETFs around the S & P 500, such as the ProShares Short S & P 500 (SH) . Trading in these leveraged and inverse index ETFs has remained strong. Today, they are usually among the most heavily traded ETFs by volume. That has not gone unnoticed by the ETF community. These new single-stock leveraged and inverse ETFs are seeking to capitalize on activity that is far more speculative than simply investing in plain-vanilla ETFs, or even leveraged and inverse index ETFs. For active investors, there are obvious advantages to single stock leveraged and inverse ETFs. It makes shorting much simpler, for example. But many in the ETF community have voiced concerns about their proliferation. The daily reset of the values of the ETF are particularly difficult for investors to get their heads around. "The people who need the education don't understand the risks tied to these ETFs," Todd Rosenbluth, head of research at VettaFi, told me. "Unlike traditional ETFs, the risk is enhanced. They are appropriate in the hands of a skilled investor, but I am concerned a lot of investors are not skilled enough to understand what they do." Gary Gensler has similar concerns SEC Chair Gary Gensler has expressed concern about leveraged and inverse ETFs and other "complex" products several times. In a speech in May, he said these funds "can present unique and potentially significant risks to investors across market sectors." SEC Commissioner Caroline Crenshaw took particular aim at single-stock ETFs: "While I have expressed concern about leveraged and inverse ETFs before, I worry that these single-stock ETFs pose yet another, perhaps greater, risk for investors and the markets," she said in a statement last month. But Gensler has a problem: The SEC has already approved the basic structure of leveraged and inverse products. Of course, that doesn't mean they are right for all investors, or even most investors. Reggie Brown, a principle at GTS, has been influential in the ETF marketplace for decades. He told me the SEC could not prevent investors from going to the marketplace, but they could limit access. "You cannot inhibit investor access to legal products, but you can make it more difficult," he told me. "You can, for example, make investors take a test to prove they know what they are investing in." Gensler has floated the idea of taking tests to prove competence in "complex" products. Whether that ever comes to fruition may depend on the trajectory of some of these new products. Want to learn more about single stock ETFs? Will Rhind, CEO of GraniteShares, Dave Mazza, Managing Director and Head of Product at Direxion, and Reggie Brown, Principal at GTS, will be my guests on ETF Edge Monday at 1 PM ET. ETFedge.cnbc.com

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