ETFs

Single-Security ETFs Begin Their North American Tour

By: Andres Rincon

September 7, 2022 - 2 Minutes 30 Seconds

An Image of rising and decline stocks on a chart

The U.S. investment community was recently introduced to a new type of equity ETF. Although ETFs are known for diversification benefits, they are also a wrapper for single securities. While day traders are celebrating these products, regulators remain cautious as long-term market implications are unclear. Recently, single-bond ETFs were listed on the heels of single-equity ETFs, stimulating further ETF product discussions.

We highlighted these ETF products in Are Single-Stock ETFs the Next, Big Trend? Unlike single-equity ETFs, single-security fixed-income ETFs are not leveraged. The jury is still out on whether this will become a gamechanger for fixed-income investors. Below, we detail the wide uses and nuances of single-bond ETFs.

Single-Bond ETFs, Explained

For many investors, single-stock ETFs are a straightforward product. The audience for single-bond ETFs is much smaller than that of single-stock ETFs because it is less common for retail investors to bet on the yield curve versus a popular stock. Given that single-bond ETFs hold the latest issuances of their respective tenors, investors strive to pull profits from movements in the yield curve. These ETFs not only act as a one-stop shop for retail clients to gain yield curve exposure; they are also powerful tools for yield curve traders who do not wish to trade in the bond market directly.

ETF wrappers offer more liquidity than underlying bonds, especially for smaller ticket sizes where retail investors can interact directly in the secondary market and in the absence of a market maker. International retail investors may also gain additional benefits from these ETFs, as well as convenient access to the U.S. treasury market. In Canada, these ETFs can be traded via online brokers, while retail clients can only trade underlying bonds via phone inquiries. The trading convenience and pricing transparency also helps facilitate U.S. rates investment among international investors.

For institutional clients, particularly overseas asset managers who want easy access to the U.S. bond market, these ETFs are useful building blocks for portfolio management that offer low-cost, liquid exposure to the U.S. yield curve. In addition, if an active options market develops, it may expand various ETF views on U.S. rates.

The Evolution of ETFs

Like many, new products, single-stock ETFs may sow doubts across the investment community. While the long-term success of single-bond ETFs remains uncertain, it is clear these ETFs create easy access to the U.S. treasury market for domestic and international investors, while boosting the liquidity of the underlying bond market. If these ETFs build staying power, it may not be surprising to see growth in this space.

Considering that ETFs are being used as a wrapper for many asset classes— from broad market indices, to commodity, cryptocurrency, and single securities— we may see more ETF varieties sprout up, especially if single-bond ETFs continue their momentum in the U.S.

Disclaimer

This material is intended to provide commentary on securities markets discussed herein. Not Advice: The information contained in this material is for informational purposes only and is not intended to provide professional, investment or any other type of advice or recommendation, or to create a fiduciary relationship. Neither TD Securities (USA) LLC (“TD Securities USA”) nor any of its affiliates (collectively, “TD”) makes any representation or warranty, express or implied, regarding the accuracy, reliability, completeness, appropriateness or sufficiency for any purpose of any information included in this material. Certain information may have been provided by third-party sources and, while believed to be reliable, has not been independently verified by TD, and its accuracy or completeness cannot be guaranteed. You should not make an investment decision in reliance on this material, which is intended to provide only brief comments on the topics addressed and is based on information that is likely to change without notice. Further, this material does not include risk factors or other material information necessary to make an investment decision and does not take into account your investment objectives or financial condition. You should obtain your own investment, tax, accounting, and legal advice, as appropriate, in order to assist them in deciding whether to enter into any securities transaction. Not Securities or Derivatives Research: This material has not been produced, reviewed or approved by TD’s securities or derivatives research departments, and is not subject to the independence and disclosure standards applicable to securities and derivatives research reports. The views of the author may differ from others at TD, including TD securities or derivatives research analysts. Not Independent: The views expressed in this material may not be independent of the interests of TD. TD may engage in conflicting activities, including principal trading before or after posting this material, market making, lending, or the provision of investment banking or other services involving issuers and securities referred to in this material. TD may have a financial interest in the securities discussed in this content, including, without limitation, an option, right, warrant, future, long or short position in the security. Not An Offer or Solicitation: Nothing contained in this material is, or should be construed as, an offer, a solicitation of an offer or an invitation to buy or sell any security, and it is not intended for distribution in any jurisdiction where such distribution would be contrary to law. Risk of Loss: Securities transactions involve risk of loss and are subject to the risks of fluctuating prices and the uncertainty of dividends, rates of return and yield. You should weigh potential benefits against the risks. Past performance is no indicator of future performance and the materials are not intended to forecast or predict future events. Not a Valuation: This material is not an official valuation of any security or transaction mentioned herein. Any pricing information provided is indicative only and does not reflect a level at which TD may be prepared to execute a trade; nor is it intended to demonstrate actual results that may be achieved by any transaction.

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).