ETFs

Are Single-Stock ETFs the Next, Big Trend

By: Andres Rincon

August 30, 2022 - 2 Minutes 30 Seconds

The SEC recently backed the listing of several single-stock ETFs, many of which gained traction thanks to retail investors. In some cases, these products are attached to big-name stocks, which helps daily trading volumes climb steadily, and translates to success across North America. With more than 35 single-stock ETFs lining up for approval, many investors and industry experts believe single-stock ETFs have the potential to be a big hit. Below, we share some key insights on this novel product.

The Need for Leverage & Short Selling

Single-stock ETFs offer some investors access to leverage and short selling. Retail investors, for example, are unable to access a margin account or trade options by themselves, but they may still want to act on their market instincts when it comes to specific stocks. This explains why single-stock ETFs target retail investors, as opposed to institutional investors, who can access leverage or short sell on their own. Lively discussions on single-stock ETFs across social media also showcase a new way to market single-stock ETFs, especially considering that Millennial and Generation Z investors have different investing preferences than previous generations.

Caution Around Single-Stock ETFs

Although the SEC moved forward with launching single-stock ETFs, it issued a special statement to investors that reiterated the risks of holding single-stock ETFs compared to traditional ETFs. Single-stock ETFs track the performance of a single stock as opposed to a variety of stocks, which reduces diversification. Single-stock ETFs also exclusively focus on providing daily levered or inverse returns, unlike most ETFs that target long-term returns. Investors should note that if they hold single-stock ETFs for longer than one day, the performance of those funds may differ from the levered or inverse performance of their underlying stocks over a longer period of time.

Big Potential & High Competition

With over 4,000 stocks across the U.S. equity market, the potential for new single-stock ETFs is enormous. Theoretically, every stock could have a levered or inverse ETF. The drawback is that since this strategy is easy to understand, the chances of replicating it are high, creating significant competition. Although experienced ETF investors may not be interested in entering this space, small- and medium-sized ETF investors may be incentivized to launch a suite of single-stock ETFs for popular stocks. There is a substantial early mover advantage on each stock, but there are plenty of tickers to use as an underlying resource. It is also possible that active stocks will be targeted as the market can quickly become saturated given the limited amount of available money.

The Impact on Canadian ETFs

There has not yet been a public filing for single-stock ETFs in Canada. That being said, levered and inversed ETFs are available in Canada, so it could only be a matter of time before we have access to single-stock ETFs. Most likely, concerns around the scale and the depth of the Canadian equity market, and whether it can handle single-stock ETFs, will be addressed by regulators before single-stock ETFs are introduced to the Canadian public. Regulators may also have an issue with single-name concentration, which will require research on the impact of these ETFs on both underlying stocks and a stock market with lower liquidity. Overall, Canada's progressive regulatory environment may play a role in levered or inverse single-stock ETFs arriving sooner than we think.

Disclaimer

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Andres Rincon
Director and Head of ETF Sales & Strategy, TD Securities

Biography

Andres Rincon heads ETF sales and strategy at TD Securities. His ETF team advises both institutional and wealth investors on the ETF landscape and strategies, publishes a broad array of ETF publications, and works with TD's ETF market making team in facilitating ETF orders. Andres joined TD Securities in 2008, first managing credit risk for the dealer, and later as a member of the Equity Derivatives division. He later took on the task of expanding TD Securities' ETF sales and strategy platform. He is also a Chartered Market Technician (CMT).