In July, AXS Investments debuted US-based investors’ first single stock Exchange Traded Funds. These ETFs allow investors to gain leverage on certain individual stocks.
However, because you are using leverage, there is more risk involved, and the authorities want investors to understand these risks before purchasing these new products.
The risks are associated with the leveraged exposure these new ETFs offer and the risk associated with investing in individual stocks. But since leverage is being applied, the risk level multiplies.
For example, one of the new ETFs being offered is the AXS 2X NKE Bull Daily ETF (NKEL) which provides investors 2X leverage to Nike (NKE) stock. This would mean that if you owned NKEL on a day when Nike stock increased by 0.50%, the NKEL ETF, which is 2X leverage, will go up 1.00%.
But, the opposite is also true. So if Nike stock fell by 1%, the NKEL ETF, which tracks Nike stock at a 2X leveraged ratio, would lose 2%.
Leverage is a very nice thing to have when it is being applied in the direction you want it to move. But leverage can be deadly when it is going against you.
Hence why the Securities and Exchange Commission is warning investors of the dangers associated with any single stock ETF, even if it is not marketing itself as leveraged.
One example of a new single stock ETF that is not marketing itself as leveraged is the AXS TSLA Bear Daily ETF (TSLQ). This ETF only tracks Tesla, but to the downside with just 1X leveraged exposure.
This essentially means that the TSLQ is shorting Tesla. But, unlike having to short a stock, which would require approval from your broker, a margin account, and the risk of not losing more than 100% of your investment, you simply have to buy this one ETF and not worry about the other things.
AXS currently has eight single-stock ETFs:
The AXS TSLA Bear Daily ETF (TSLQ), shorts Tesla.The AXS 1.25X NVDA Bear Daily ETF (NVDS) is short NVDA.The AXS 1.5X PYPL Bear Daily ETF (PYPS) which shorts PayPal.The AXS 1.5X PYPL Bull Daily ETF (PYPT) which is long PayPal.The AXS 2X NKE Bear Daily ETF (NKEQ) which is short Nike.The AXS 2X NKE Bull Daily ETF (NKEL) which is bullish Nike.The AXS 2X PFE Bear Daily ETF (PFES) is short Pfizer.The AXS 2X PFE Bull Daily ETF (PFEL) is long Pfizer.
The leveraged ones have the amount of leverage they are providing in the name of the ETF. But all the funds currently charge a 1.15% expense ratio and are intended to be held one day at a time due to the contango effect caused by gaining leverage or the inversion.
More single stock leveraged and inverse ETFs are coming to the market as Direxion, GraniteShares, and Kurv Investment Management all have filed with the SEC to be permitted to offer their own single stock ETFs.
The filing shows that roughly 35 stocks will have a corresponding ETF, with some being blue chip stocks, some in the technology world, some in energy, and even some that are just very volatile stocks.
Investors are and will continue to be given a lot of opportunities to invest with leverage and make ‘bets’ on the direction of individual stocks.
But, just because you can do something does not always mean you should do it.
Learn more about the risks of investing in these ETFs and how contango will affect your investment if you hold these ETFs for longer than one day at a time before owning these single stock ETFs.
Matt ThalmanINO.com ContributorFollow me on Twitter @mthalman5513
Disclosure: This contributor did not hold a position in any investment mentioned above at the time this blog post was published. This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from INO.com) for their opinion.