July 17, 2024

By Sam Taube
Financial advisers are wary–here’s why
This article is reprinted by permission from NerdWallet. The investing information provided on this page is for educational purposes only. NerdWallet does not offer advisory or brokerage services, nor does it recommend or advise investors to buy or sell particular stocks, securities or other investments.
These days, exchange-traded funds, or ETFs, can do much more than passively track a basket of stocks. For example, recently introduced single-stock ETFs allow traders to place big bets on individual stocks.
The first single-stock ETFs hit U.S. markets in July 2022 — but since then, several ETF issuers have launched new ones. Here’s a look at how they work, why they’re catching on and what advisers have to say about them.
What are single-stock ETFs?
Single-stock ETFs are leveraged ETFs whose performance is related to the daily return of an individual stock. They come in a few different varieties:
As with other leveraged ETFs, single-stock ETF issuers try to meet their target returns by trading complex financial instruments called derivatives.
Traders could use single-stock ETFs to double down on short-term bets on companies such as Apple (AAPL), says Malcolm Ethridge, a Rockville, Maryland-based certified financial planner and vice president of CIC Wealth.
However, Ethridge stresses that single-stock ETFs are not long-term investments.
"They are a day-by-day, ticker-by-ticker strategy. They’re not meant to be purchased on Monday if you expect to hold onto them until Friday," he says.
Also see:Here’s where ETF investors plan to put money to work in coming year — and how their generational attitudes shake out, Schwab study finds
What is driving the single-stock ETF trend?
Will Rhind is the CEO of GraniteShares, a New York City-based ETF issuer that has launched several single-stock ETFs. He says that the single-stock ETF trend is driven by the popularity of leveraged ETFs overseas and by recent changes in regulation.
"We have plans to do a bunch of these products on various companies," Rhind says. "We’ve been doing this in Europe for a few years — that’s kind of where the idea started."
"There were only two companies allowed to issue leveraged products [in the U.S.] until a couple of years ago, and they were ProShares and Direxion," says Rhind. "That changed with updated new rules that came out a couple of years ago."
Ethridge agrees that regulatory changes have played a significant role in the rise of single-stock ETFs — but he has a different view of where the trend is coming from.
"I think it’s trying to meet the market where it was back in 2020," he says, referring to the early-pandemic-era trend of trading meme stocks and options
"Robinhood (HOOD), by making it possible for average people to invest in options, woke [Wall Street] up to the fact that regular people want to be able to invest this way," Ethridge says. He said he thinks single-stock ETFs are a kind of options-trading substitute for people who don’t know how to trade actual options or don’t have permission to do so.
More:Single-stock ETFs: ‘We’re going to see this entire ETF category absolutely explode’
Should you buy single-stock ETFs?
Advisors are wary of recommending single-stock ETFs because of their risky nature.
"These types of instruments, they’re not for the faint of heart," says Frank Paré, an Oakland, California-based certified financial planner with PF Wealth Management and a former president of the Financial Planning Association.
"I wouldn’t recommend it for an average investor. I wouldn’t recommend it for a long-term investor. I wouldn’t recommend it for an investor," Paré says. "I would recommend it for those who are into speculating and have a high tolerance for risk."
Ethridge also thinks there are a lot of potential downsides to single-stock ETFs. "Because of all the leverage involved, things can go wrong really quickly," he says, adding that the funds’ fees will likely "erode any positive returns."
The U.S. Securities and Exchange Commission has voiced similar concerns. It has warned investors that the returns of such ETFs can diverge from their targets over time due to their complicated inner workings.
"The daily rebalancing and effects of compounding may cause returns to diverge quite substantially from the performance of the, in this case, one underlying stock, especially if these products are held over multiple days or more," SEC Commissioner Caroline Crenshaw wrote in a statement on the SEC website in July 2022.
Get MarketWatch’sETF Wrap delivered to your inbox
Paré says he thinks most people are better off avoiding single-stock ETFs and relying on time-tested strategies to build wealth.
"Go the slow, boring route of steady returns over a period of time, rather than speculating in the market," he says. "If you feel you need to [speculate], do it in a way that’s responsible; take a very small amount of your portfolio."
Neither the author nor editor held positions in the aforementioned investments at the time of publication.
More From NerdWallet
Sam Taube writes for NerdWallet. Email: st****@ne********.com. Twitter: @samuel_taube.

(END) Dow Jones Newswires
09-27-22 0507ET
Transparency is how we protect the integrity of our work and keep empowering investors to achieve their goals and dreams. And we have unwavering standards for how we keep that integrity intact, from our research and data to our policies on content and your personal data.
We’d like to share more about how we work and what drives our day-to-day business.
We sell different types of products and services to both investment professionals and individual investors. These products and services are usually sold through license agreements or subscriptions. Our investment management business generates asset-based fees, which are calculated as a percentage of assets under management. We also sell both admissions and sponsorship packages for our investment conferences and advertising on our websites and newsletters.

How we use your information depends on the product and service that you use and your relationship with us. We may use it to:
To learn more about how we handle and protect your data, visit our privacy center.
Maintaining independence and editorial freedom is essential to our mission of empowering investor success. We provide a platform for our authors to report on investments fairly, accurately, and from the investor’s point of view. We also respect individual opinions––they represent the unvarnished thinking of our people and exacting analysis of our research processes. Our authors can publish views that we may or may not agree with, but they show their work, distinguish facts from opinions, and make sure their analysis is clear and in no way misleading or deceptive.
To further protect the integrity of our editorial content, we keep a strict separation between our sales teams and authors to remove any pressure or influence on our analyses and research.
Read our editorial policy to learn more about our process.
© Copyright 2022 Morningstar, Inc. All rights reserved. Dow Jones Industrial Average, S&P 500, Nasdaq, and Morningstar Index (Market Barometer) quotes are real-time.
This site is protected by reCAPTCHA and the Google Privacy Policy and Terms of Service apply.


About Author