Buffer or bet against? Here are some new strategies for single-stock ETFs

Investors have had prolonged exposure to inverse and leveraged ETFs, mainly tied to investments like commodities, currencies and indexes.

But in recent weeks, funds that provide that same type of exposure to a singular stock have entered the market as a new tool for short-term traders to bet on.

Single-stock ETFs allow investors a leveraged or short position in a particular stock in lieu of shorting it. It’s a growing alternative for investors to make bullish and bearish bets on large-cap stocks.

Innovator launched its Hedged TSLA Strategy ETF (TSLH) on July 26. It acts as a buffer by providing the price return of Tesla‘s stock up to a cap, while hedging the downside risk over a three-month period.

It’s one of the newest in a fund family that is only weeks old. AXS Investments launched a suite of single-stock funds last month.

“The race is on with the ETF issuers,” Ben Slavin, global head of ETFs at BNY Mellon, said in an interview with Bob Pisani on CNBC’s “ETF Edge” on Monday. “You are going to see products up and down some of the larger mega-cap names. And I think you’re going to see multiple tickers for each of those stocks out there.”

Among the arrivals in AXS lineup is the TSLA Bear Daily ETF (TSLQ), which delivers the inverse daily performance of Tesla. The firm also offers inverse ETFs tied to names like PayPal, Nike and Pfizer.

“If you short a stock, you have infinite losses – theoretically, on paper,” Andrew McOrmond, managing director at WallachBeth Capital, said in the same interview. “You could lose three times what you put in by shorting Tesla.”

McOrmond noted that an advantage of leveraged or inverse ETFs like TSLQ is that you can only lose what you put in. But because they reset exposure daily, they’re more designed for short-term bets: the more volatile the name, he said, the more the reset over time will affect performance.

“If you look at a chart of the short S&P levered ETFs over a year, they all go to zero,” McOrmond said. “Because of the daily reset and because the market generally goes up, these are short-term bets unless you are betting that the stock is going to zero.”

Slavin added that while he has concerns about how some retail investors will use or misuse these products, ETFs like TSLQ are still less volatile than other products already on the market.  

“The convenience aspect is huge,” Slavin said. “But it’s important that these products also have their downsides. And to remind investors that these products are no different than the other index-based products that have been out there for years.”