A new investment product has emerged in U.S. markets this summer: the single stock exchange-traded fund (ETF).
Over the last three decades, ETFs have become a hugely popular investment vehicle. The first ETF emerged in the U.S. in 1993; currently there are thousands available and ETFs have some $10 trillion in assets under management. Historically, ETFs have allowed investors to buy into a basket of stocks, like a mutual fund, but with the value of the ETF being recalculated every day, like an individual stock.
Now, ETFs are being offered that allow investors exposure to a single stock. This week, for example, GraniteShares began offering single-stock ETFs for Apple, Coinbase, and Tesla.
Will Rhind, the CEO of GraniteShares, said that the funds offer “amplified exposure” to these popular stocks. One of GraniteShares’ funds, for example, offers investors 1.75 times the increase in Apple stock; if the stock goes up a dollar on a given day, the fund will pay its investors $1.75. That also means that if the stock goes down a dollar, the investor loses $1.75. A firm like GraniteShares theoretically makes money on such offerings by charging management fees that are higher than the industry norm. Other single stock ETFs allow investors to make a negative bet—similar to shorting—on a stock, profiting from a decline in its share value. As a result, the most likely purchasers of single stock ETFs are active investors, as opposed to long-term, buy-and-hold investors.
Single stock ETFs have been available outside the U.S. since at least 2019; GraniteShares says that it offers 106 such funds in the largest European markets and the U.K.
Regulators have expressed concern about single stock ETFs. In a statement issued in July, Securities and Exchange Commission commissioner Caroline Crenshaw said: “While I have expressed concern about leveraged and inverse ETFs before, I worry that these single-stock ETFs pose yet another, perhaps greater, risk for investors and the markets.” She added that “investors’ returns over a longer period of time might be significantly lower than they would expect based on the performance of the underlying stock. These effects are likely to be especially pronounced in volatile markets.”
Rhind does not dispute that single stock ETFs are risky. “It’s not for everybody,” he said. “This is for people who want to take risks.”