US issuers push for leveraged and inverse single stock ETFs
GraniteShares is the latest to file for a suite of leveraged and inverse single-stock ETFs in the US, writes Bailey McCann.
ETF issuers are making a big push to bring leveraged and inverse single stock ETFs to investors.
Leveraged and inverse ETFs, which allow investors to make directional bets on the broad market or on specific themes, have been available for a number of years. Until recently, this group of funds has been limited to a small number of issuers - primarily ProShares and Direxion. Now the category is expanding and becoming more granular.
In November, boutique issuer Tuttle Capital launched their Short Innovation ETF (SARK) which shorts the popular ARK Invest Ark Innovation ETF (ARKK) bringing directional bets down another level from sectors to specific funds.
Now, issuers want to bring the same option to individual stocks. In January, boutique issuer Innovator ETFs filed for a fund that would provide hedged exposure to Tesla.
By February, larger issuers were ready with full line-ups. Alternative asset manager AXS Investments filed for a suite of 18 ETFs each designed to replicate two times either the daily performance or daily inverse performance of single stocks. AXS also moved to get in on the 'bet on ARK invest' thesis with a January filing for an ETF that would give 2X exposure to ARKK.
AXS' filing was quickly followed by a similar one from Direxion for 21 single stock leveraged and inverse funds.
Now, GraniteShares is getting into the mix in the US. It has a substantial leveraged and inverse business in Europe. On Monday, the issuer filed for a lineup including 19 leveraged and inverse single stock ETFs.
Most of these filings target mega-cap tech stocks like Meta, Microsoft or Tesla. Although if they are approved, it's unclear whether issuers will stop there.
The potential expansion of this category of ETFs comes as the SEC is taking a closer look at the universe of leveraged and inverse exchange traded products. In October, SEC Chair Gary Gensler directed the SEC to study leveraged and inverse ETPs to ensure that retail investors were fully aware of their potential.
Initially, the primary users of these products were professional traders making tactical decisions about portfolios. Typically, leveraged and inverse ETPs are used for a single day or a handful of days around some type of catalyst event. But recently, they've gained wider popularity with retail investors that have become more active in the market during the pandemic. Because these funds have the potential to 2X or 3X a given investment, they appeal to individual investors hoping to double their money. But, if you bet the wrong way, you can also lose 2X or 3X your investment.
In his October statement, Chairman Gensler cited concerns voiced by other SEC members about the risk to retail portfolios going as far back as 2009. Given that, it's not entirely clear that the SEC will approve the 60 odd funds now waiting in the queue.
Of the lot, it appears AXS filing for its 2X ARKK fund has the most straightforward path to approval since Tuttle Capital’s SARK has already been approved and garnered more than USD300 million of assets. Watch this space.