Single-stock ETFs: a safe(ish) way to gamble?

Single-stock ETFs have made quite a splash since their introduction to US markets this summer. I recommend treating the latest hot fad with a healthy degree of skepticism… but this one could have its uses. Specifically, these new ETFs could be a good solution for long-term investors who want to dabble in the high-octane (if less sensible) world of short-term trading.

How do they work?

Single-stock ETFs are immediately attention-grabbing because of their name. ETFs normally consist of a portfolio of multiple stocks – so how does an ETF of one stock even make sense? Why not just, you know… buy the stock itself?

The twist is that single-stock ETFs offer a multiple of an individual stock’s daily returns – either on the upside or downside. So if you think AAPL is about to see short-term gains, for example, you could earn an extra 50% on those gains with a 1.5x AAPL ETF. Or if you expect AAPL to tank in the short term, you could earn from its losses with a -1x AAPL ETF.

Emphasis on the “short-term” part, however.

In order for those extra or inverse gains to work out as advertised, all kinds of hocus-pocus with swap contracts has to happen behind the scenes every day. So while you are guaranteed 1.5x or -1x on the underlying stock’s daily returns, long term returns will not be so simple. Even finance super-pro Bill Hwang — of the (in)famous Archegos hedge fund — lost everything and more on complicated products like these.

What are they for?

All of this is to say that single-stock ETFs are best used for the short game. And I mean short: even their top developers recommend a holding period no longer than 1-3 days

For example, suppose Apple is about to release the iPhone 14 Super-Awesome Pro Max Ultra and you expect its stock to briefly spike. So you grab a few shares of that ETF ahead of the release date and, sure enough, AAPL gets a 5% bump that day. If you turn around and resell at the end of the day, congrats – you just earned 7.5% on whatever you put in!

Not a huge win, perhaps; but it is a neat little trick you could never pull off with your IRA or 401(k).

So to sum up: single-stock ETFs are pretty much pointless for long-term investment, and therefore no good to the everyday retirement saver. But they could be useful if you want to experiment with alternative investments and:

  1. You can do so without cutting into your primary investments or cash reserve;
  2. You feel confident about the short-term movement of the stock in question;
  3. You stick to very short holding periods.