Next Sign of Market Apocalypse: Single Stock ETFs – CNN | Region & Cash

Asset management firm AXS Investments recently launched funds that allow investors to make outsize bets on — or against — the daily performance of individual stocks.

AXS now offers ETFs that use leverage through exotic instruments known as derivative contracts to allow traders to gain either an enhanced long (bullish) or short (bearish) position PayPal (PYPL), Pfizer (PFE) and Nike (NKE). There are also two ETFs that only offer super short positions Tesla (TSLA) and NVIDIA (NVDA).

If you bet correctly, investors can make big profits from small bets. That’s because on good days, the long ETFs should rise even more than the actual stock, while the short ETFs are designed to fall further.

For example, on Monday, when shares of Pfizer rose 1.1%, the bullish Pfizer ETF gained 2.4% and the drugmaker’s bearish ETF fell 2.3%.

Greg Bassuk, the CEO of AXS, said in a press release about the launch of ETFs that the funds would allow investors “to express their conviction on some of the most actively traded individual stocks, whether their sentiment is bullish or bullish.” is pessimistic. ”

But make no mistake. This is an extremely risky strategy that caters to many of the short-term traders in the Reddit WSB crowd, and is just another example of the casino-like vibe in the market.

Bad long or short bets could fare significantly worse than a typical loss-buying stock.

To his credit, AXS clearly states on its website that the ETFs are “intended to serve as a short-term vehicle.” AXS also has many words of caution in its press release, noting that they are “not appropriate for investors who do not intend to actively monitor and manage their portfolios.”

AXS goes on to say that “for periods longer than one day, the Funds will lose money if the performance of the underlying stock remains unchanged” and “an investor could lose the full principal of their investment in a single day.” AXS added that the ETFs do not offer “the benefits of diversification” and “pose unique and complex risks.”

Stock ETFs are not for the faint of heart

Because of this, any investor considering investing in any of these ETFs needs to be very, very cautious.

“These products could be risky for those investors who hold them for long periods without understanding the mechanics of daily rebalancing,” said Aniket Ullal, vice president of ETF data and analytics at CFRA Research, in a report. “Educating investors about these products will be critical when they are launched.”

The Securities and Exchange Commission has approved the ETFs, but two regulators are still nervous.

Venmo-owner PayPal is one of the worst-performing stocks of 2022

“I’m concerned that these single-stock ETFs pose another, perhaps greater, risk to investors and the markets,” SEC Commissioner Caroline Crenshaw said in a release.

“Investors’ returns over an extended period of time could be significantly lower than they would expect based on the performance of the underlying stock. These effects are likely to be particularly pronounced in volatile markets,” she added.

And Lori Schock, the SEC’s director of investor education, said in her own statement that “while these products are listed and traded on an exchange, they are not suitable for every investor.”

Investors are increasingly looking to diversify their holdings with ETFs that track the performance of popular indices like the S&P 500 and Nasdaq 100.

These index ETFs, as well as more niche sector and thematic ETFs, tend to have a broader mix of companies. So they’re inherently less risky than a single stock, let alone a fund taking a leveraged bet on just one company. For this reason, investors need to be careful with single-stock ETFs.

“Familiarity with these stocks or a successful track record while holding them can discourage investors from diversifying,” said Bryan Ting, a researcher at Dimension Fund Advisors, and Wes Crill, the company’s head of investment strategists, in a recent published blog post.

“This can lead to one of the most well-known cautionary tales in finance: tragic fortune losses from single security losses. Data on the behavior of individual stocks suggests that it’s not uncommon for companies to underperform — or even go under,” she said, noting that only a fifth of stocks survive and outperform the market over 20 years.

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