Eq: Tech

Single-stock ETFs were introduced in Europe in 2018 and last year in the US. Now, there are nearly 50 single-stock ETFs with the majority of them tracking mega cap tech stocks like Microsoft, Nvidia, Amazon, and Tesla. Collectively, they have $3.3 billion in assets. Providers include Direxion, AXS, GraniteShares, and YieldMax and strategies fall under option income, bull, or bear.

 

The largest one is the Direxion Daily TSLA Bull 1.5x Shares which has over $1 billion in assets and tracks the underlying stock with leverage by using swaps and other derivatives. The second-largest at $841 million in assets is the YieldMax TSLA Option Income Strategy ETF. This category of single-stock ETFs will sell call options on the underlying stock to generate monthly income. 

 

The recent success of these ETFs isn’t surprising given the strong performance of tech stocks this year with many hitting all-time highs. According to Rich Lee, the head of ETF trading at Robert W. Baird & Co., more single-stock ETFs will be hitting the market due to strong demand for these products, and he expects more innovation as well.

 

The current crop of single-stock ETFs are more suited for short-term speculation rather than long-term investing given higher costs. In August, the SEC issued a warning about these products, “Because leveraged single-stock ETFs in particular amplify the effect of price movements of the underlying individual stocks, investors holding these funds will experience even greater volatility and risk than investors who hold the underlying stock itself,” which encapsulates the risks. 


Finsum: Single-stock ETFs are a small but fast-growing category. While they’ve performed well due to the bull market in tech, they remain unsuitable for long-term investors. 

 

Sure tech investors have had their share of ups and downs, but they have been largely insulated from the market’s bigger losses but things could change. The underlying trends in the technology sector are looking as bad as they have in a long time. There is severe weakness in consumer-oriented hardware products. Moreover, as supply chains relax these prices could fall further. Additionally, sub-sectors such as enterprise tech spending are starting to deteriorate. The weakening demand is beginning to show at the company level as earnings season shows signs of weakness in technology. While there have been outliers such as Cisco, the market might not be ready for widespread tech deterioration.


Finsum: The other huge problem is rising interest rates and rampant inflation which lower the value of future earnings and make growth stocks less attractive.

Hedge funds have made it clear they are gonna short those not meeting ESG criteria, but the broader market is still willing to short Tesla because the bottom line means more. Despite all of its sustainability credentials investors are making bets against Tesla. Bill Gates took a big short position apparently, and Tesla CEO Elon Musk chirped back on Twitter, saying it's incompatible with their environmental concerns. All of this happens as Musk secured $44 billion to buy Twitter Inc. This isn't the first time Tesla is no stranger to short-sellers as sharks swarmed the brand for years as they thought they couldn't ramp up production to meet the actual demand. Tesla’s stock skyrocketed nonetheless.


Finsum: Short positions on these public favorites can be extremely risky poisons, there have been lots of strange rallies in the internet era.

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