When you think of exchange-traded funds (ETFs), you're probably thinking of investments that contain dozens of stocks, or even hundreds. The advantage of investing in ETFs is that they can help you diversify.
But there are new ETFs that focus on just single stocks. Through these ETFs, investors can amplify their returns or even short a stock. Could this be a way to beat the current bear market?
The advantage of single-stock ETFs
If you invest in an ETF that contains hundreds of stocks, your overall returns are going to be much more muted than if you hold just a single successful stock. It's the cost of too much diversification: Your gains aren't going to be as significant, but your losses also won't be as deep.
But if you're confident in your stock-picking ability, you might find one of AXS Investments' new leveraged single-stock ETFs desirable. For example, they have a couple of ETFs with bearish and bullish positions on Pfizer. If you're convinced the healthcare company is going to rise in value, you might invest in the bullish ETF that AXS has, which aims to double the daily performance of the ticker by using leverage. There's also a bearish ETF, which looks to do the opposite: achieve two times the inverse of how the stock does on a daily basis.
Rather than buying options to amplify your gains, you could invest in the bullish ETF. And if you think Pfizer is going to decline and you want to short it, you could invest in the bearish ETF without worrying about having a margin account and potentially incurring unlimited losses if you're wrong. In addition to Pfizer, AXS also has bearish and bullish ETFs for Nike and PayPal Holdings. For Tesla and Nvidia, AXS only offers bearish ETFs.
The downside of single-stock ETFs
It sounds great that you could potentially double down on an investment or short a stock without actually having to short it yourself. But the risk with these ETFs is that they don't make for good long-term investments.
Consider the S&P 500, which over the long term has delivered gains of about 10% per year. There are a couple of leveraged ETFs that currently let you take bearish and bullish positions on it. And here's how those investments have performed over the past three years, alongside the S&P 500.
SPXL total return level. Data by YCharts.
The S&P itself is up 38%, and even the 3x leveraged bullish ETF wouldn't have tripled those gains simply because it focuses on daily returns. Volatility can negate many of the benefits you might expect from a leveraged ETF. And if you were bearish on the index, the leveraged ETF focused on the inverse would leave you with losses of nearly 90%.
These types of ETFs (both the ones in the chart and the ones AXS offers) focus on daily returns and aren't ideal for long-term positions because significant changes in value from one day to the next can negate any benefit you obtain from owning them.
Investors are better off not using single-stock ETFs
Although these new leveraged single-stock ETFs might seem like good options if you're extremely bullish or bearish on a stock, these can be risky investments. Not only is there the risk, but their management fees are also higher than other ETFs. While the Health Care Select Sector SPDR Fund gives you broad exposure to healthcare stocks, its gross expense ratio is just 0.10%. By comparison, the leveraged single-stock ETFs that AXS offers have expense ratios of 1.57%.
Ultimately, if you're bullish on a stock, the safest option is to just invest in it. And if you're really optimistic about it, you could invest more money in it. But using leverage can be risky, and in the end, might not lead to much better results. And they certainly aren't reliable options for outperforming in the current bear market given its volatility.
