In the summer of 2022, the U.S. Securities and Exchange Commission (SEC) approved the availability of single stock leveraged and/or inverse exchange traded funds (ETFs) to retail investors.
Single stock leveraged (and inverse) ETFs are very similar to their leveraged and inverse ETF counterparts, however they target the performance of a single stock rather than an entire index. Therefore, at a fundamental level these single stock ETFs do not offer the same benefits of the “built in” diversification of all index ETFs. Instead, they concentrate your exposure to a single ticker, which can be more volatile, leaving room for extreme price swings.
For example: Stock “ABC” has an extremely negative earnings report or insider scandal, and the share price drops by 35%. The 2:1 leveraged ETF tracking this underlying stock will experience a drop in share price by 70%.
These single stock leveraged and inverse ETFs offer many of the same benefits as their index counterparts including availability in registered accounts, and providing daily amplified gains (or losses) on the underlying stock.
Before diving deeper into single stock leveraged and/or inverse ETFs, make sure you understand how their “traditional” index counterparts work. Most of the same risks associated with leveraged/inverse index ETFs, such as the daily reset, may also be present for single stock leveraged/inverse ETFs.
Single stock leveraged and/or inverse ETFs will generally only target daily performance of the underlying stock. This means a long-term investor in a 1.5X fund, for example, could suffer magnified losses on any day when the underlying securities lose value.
Explore the examples at the end of the leveraged ETF article and Inverse ETF article for more information about the effects of leverage over time.
You can also learn more in the prospectus’ (or fact sheet) of each individual fund.
