The dangers and potential of single stock and leveraged ETFs

Some people aren't happy that single-stock ETFs are now available.

Single-stock exchange-traded funds are now available, but this development has not pleased everyone.

This week, a bunch of new ETFs based on single stocks came out.

With these ETFs, you can bet on or against individual companies using leverage.

It's the beginning of a wave of leveraged and inverse single stock ETFs that could grow to hundreds, and the SEC is already paying attention.

In the first round of these single-stock ETFs, the most interest has been shown in Tesla.

There are already five leveraged and inverse ETFs for Tesla. These ETFs give daily leveraged returns on the stock's price going up or down.

So far, the AXS TSLA Bear Daily ETF (TSLQ), which gives 1.25x inverse exposure to Tesla, has done the best.

So, if Tesla goes down by 1% every day, this ETF will go up by 1.25 percent.

There are two big exceptions to this.

First of all, this return is only every day.

At the end of each day, it starts over.

Because each day starts over, your return could be very different after a month.

The other thing to keep in mind is that the return is less fees and costs.

These ETFs are not cheap.

NVDS has a cost-to-income ratio of 1.15.

Since it started on July 14, it has sold an average of 1.2 million shares a day, which is a good amount for a new ETF.

On Tuesday, four new leveraged and inverse Tesla ETFs came out: the Direxion Daily TSLA Bear 1X shares (TSLS), the Direxion Daily TSLA Bull 1.5x shares (TSLL), the GraniteShares 1.25x Long Tesla Daily ETF (TSL), and the GranitShares 1x Short TSLA Daily ETF (TSLI).

Other single-stock ETFs that offer upside and downside exposure to Nike, Pfizer, Paypal, and NVIDIA have also just come out.

Small amounts have been traded in these ETFs, though.

There aren't any new leveraged or inverse ETFs.

Most of the nearly $7 trillion in U.S. ETFs are in funds that track broad stock indexes like the S&P 500, the Russell 2000, and the Nasdaq 100. However, there have been ETFs for a long time that provide leveraged and inverse exposure to broad stock indexes.

For example, the ProShares UltraPro QQQ (TQQQ) has been around since 2010. It gives 3x the exposure to the Nasdaq 100 (if the Nasdaq 100 went up 1%, it would go up 3% every day).

The ProShares Short S&P 500 (SH) has been around since 2006. It gives 1x inverse exposure to the S&P 500.

During Covid, however, trading in leveraged and inverse ETFs in the tech sector really picked up.

During the early days of the Covid crisis, trading in ETFs around the Nasdaq 100, like the "TQQQ" and the "ProShares Short QQQ," went up by a lot (PSQ).

So did trading in leveraged and inverse ETFs like the ProShares Short S&P 500 that are based on the S&P 500. (SH).

There has been a lot of trading in these leveraged and inverse index ETFs.

Today, they are often among the ETFs that are traded the most.

The ETF community has taken notice of this.

The goal of these new single-stock leveraged and inverse ETFs is to make money from activities that are much more risky than investing in regular ETFs or even leveraged and inverse index ETFs.

There are clear benefits to single stock leveraged and inverse ETFs for active investors.

For example, it makes it much easier to short.

But many people in the ETF world are worried about how many there are.

Especially hard for investors to understand is the fact that the ETF's prices change every day.

The head of research at VettaFi, Todd Rosenbluth, told me, "The people who need the education don't understand the risks that come with these ETFs."

The risk is higher than with traditional ETFs.

They are good for investors who know what they are doing, but I worry that a lot of investors don't know enough to understand what they do."

Gary Gensler has the same worries.

Gary Gensler, the head of the SEC, has said more than once that he is worried about leveraged and inverse ETFs and other "complex" products.

In a speech he gave in May, he said that these funds "can present investors in all market sectors with unique and potentially large risks."

Caroline Crenshaw, an SEC commissioner, was especially critical of single-stock ETFs. "I've been worried about leveraged and inverse ETFs before, but I'm worried that these single-stock ETFs pose another, and maybe even bigger, risk to investors and the markets," she said in a statement last month.

But Gensler has a problem because the SEC has already approved the basic structure of leveraged and inverse products.

Of course, that doesn't mean that all investors or even most investors should buy them.

Reggie Brown, who is a partner at GTS, has had a big impact on the ETF market for many years.

He said that the SEC couldn't stop investors from going to the market, but they could make it harder for them to get there.

"You can't stop investors from buying legal goods, but you can make it harder for them to do so," he told me.

"For example, you can give investors a test to show that they know what they are doing."

Gensler has suggested that people take tests to show that they know how to make "complex" things.

Whether or not that ever happens depends on how some of these new products do.