ETF Single Stock Crack

We thought Wall Street couldn’t get any more irresponsible.

Their response – hold my beer.

Yes, from the folks that brought you The Great Recession and the more recent banking crisis comes a swath of leveraged and inverse products aimed at skirting rules and regulations.

Today we’re going to cover single stock ETFs, explaining what they are, the pros and cons, and how they work.

Why They’re Different Than Owning The Stock

The majority of retail investors who interact with the market only ever buy and sell stocks. Few short-sell stocks, trade options, or use leverage.

Seeing the need to fill trader greed, three companies decided to put together ETFs on some of the most popular stocks.

These ETFs are either leveraged, inverse or a combination of the two.

At the time this went to be published, the following were the only single-stock ETFs available:

Direxeion’s single stock ETFs carry a 1.06%-1.07% expense ratio, while GraniteShares and AXS cost 1.15%.

Performance

All of these ETFs track the daily performance of a stock, resetting each night.

Over time, this will lead to deviations from the underlying stock.

For example, let’s say Pfizer traded at $100, as did the PFEL 2x leveraged ETF.

On Monday, Pfizer gains 10%, closing at $110. PFEL would close at $120.

On Tuesday, Pfizer loses 10%, closing at $99. PFEL would close at $96.

That leaves Pfizer down 1% overall but PFEL down 4%.

Plus, you’re paying an expense ratio of over 1%, which is pretty steep. So even if the stock doesn’t go anywhere, you lose out.

And you don’t get paid a dividend.

Tradeability

Most of these ETFs are less than a year old. And a lot of folks don’t even know they exist.

So, volume is typically light, rarely exceeding 200,000 shares a day, with many trading less than 50,000 shares per day. However, some, like TSLQ, regularly trade more than 2 million shares per day.

Typically, the more popular and liquid the underlying stock, the more volume you see on the related ETF.

Our Opinion 0/10

Quite honestly, there is no reason to trade these ETFs.

In our opinion, if you want leverage, use options. Sure, lose some value over time. But so do ETFs that charge over 1% annually.

Similarly, if you want to bet against a stock, use put options.

Day traders don’t need these ETFs since pattern day trading requires a minimum balance of $25,000, and you can borrow on margin with account balances as small as $2,000 – $2,500.

In other words, for whatever idea you have, there are better alternatives.