One of an ETF’s biggest advantages is its ability to offer broad diversification in a single security. But sometimes that’s not what investors are looking for. Some are seeking out very concentrated coverage, even to the point of owning just a single stock.
Obviously, if you want to own a single stock, you should just buy a single stock, but it’s when ETFs can offer something on top of the single stock that things can get more intriguing.
Take, for instance, two ETFs that just launched that use Tesla (TSLA) as their foundation – the AXS TSLA Bear Daily ETF (TSLQ) and the Innovator Hedged TSLA Strategy ETF (TSLH). As you can probably guess from their names, they have very different objectives, but could be a good way for investors to achieve alternative outcomes without some of the hassle that could go along with them.
AXS TSLA Bear Daily ETF (TSLQ)
TSLQ‘s objective is very simple – to deliver the inverse of the daily performance of Tesla stock. Like other inverse ETFs, it uses swap agreements and will reset exposures every day. It comes with an expense ratio of 1.15%. This product, quite simply, is for people who want to bet against Tesla.
It’s worth noting that TSLQ is just one of a suite of single stock ETFs launched by AXS. It now offers single stock ETFs with varying degrees of leverage and exposure on PayPal, NVIDIA, Nike and Pfizer. In addition, the company launched the AXS 2X Innovation ETF (TARK) back in May.
Innovator Hedged TSLA Strategy ETF (TSLH)
TLSH is structured as a buffer ETF. If that strategy sounds familiar, it should. Innovator is a leader in the buffer ETF category and now expands its lineup to single stock buffer ETFs.
Like the other Innovator Buffer ETFs, TSLH will offer a specific pre-determined level of downside protection in exchange for a cap on upside share price potential over the outcome period. In this fund’s case, it will seek to limit Tesla losses at 10% per quarter. The cap on potential returns over the quarter will be 8.7% with the outcome period resetting every three months.
Why Single Stock ETFs?
Single stock ETFs may seem counterintuitive on the surface, but they can actually make some sense. The one thing that prevents a lot of investors from executing these strategies on their own is the access to margin and options accounts. Many brokerages won’t allow it for the average retail investor. ETFs are, however, accessible to virtually everyone. An ETF that bundles one of these more exotic strategies with long exposure to the stock itself is a way for the typical investor to get into the game.
Access to leveraged or inverse ETFs, however, isn’t a guarantee either. Vanguard, for instance, largely avoids allowing investors to own or trade these kinds of products. There are brokers out there that will let you trade them (Interactive Brokers should be one) if you seek them out.
In the interest of full disclosure, the SEC, even though it approved them for trading, urges a high level of caution when buying or selling. Inverse and leveraged ETFs aren’t meant for long holding periods and should be monitored regularly. There’s also single stock risk investors must consider.
When Should You Buy A Single Stock ETF?
I generally don’t play in the inverse and leveraged ETF sandbox, so I naturally land more on the side of why shouldn’t you invest in TSLQ. To be fair, there is demand for this type of product. In less than 10 trading days, TSLQ already has nearly $40 million in assets, which is a very fast start for an ETF that isn’t coming in with its own assets. The 1.15% expense ratio might seem high on the surface, but this is the cost of this kind of strategy. In fact, I think it’s actually fairly palatable compared to the likely cost of doing this on your own.
Should you invest. in TSLQ? I guess it depends on your opinion of Tesla. Looking at it purely from a standpoint of whether or not it’s an efficient means of giving investors access to a short strategy, it probably is. This is one of those cases where an ETF makes things much easier.
The case for TSLH is a little easier. Buffer ETFs are broader stocks indexes have become very popular and a good way to achieve equity exposure within a specific opportunity set. They may prevent you from achieving 100% of upside potential in a raging bull market, but it’s the elimination of varying levels of downside risk that is the most attractive feature.
And Tesla certainly has downside potential. If you want to take a swing at Tesla, but still protect yourself in the event that the bottom falls out, this is a good way to do it. Granted, Tesla can move 10% or more in a single day, but I like this as a more conservative way to add exposure.