I came across this article where “single stock ETFs” were mentioned.
Found it very interesting that US investors can invest in ETFs that take leverage and invest only in a single stock. While this amplifies earnings by 1.5-2X, the same also happens with losses.
They can also invest in ETFs that short stocks by taking more leverage.
This was interesting for me since actively managed ETFs are still not allowed in India. Only index fund ETFs are allowed
American markets are very advanced in terms of products offered.
From the article,
How Single-Stock ETFs Work
Single-stock ETFs are built around one company. One way or another, the performance of that reference stock dictates the trajectory of the ETF. These strategies distinguish themselves by using derivatives to lever, short, or squeeze more income from the stocks in question.
We can crudely put single-stock ETFs in two broad buckets: leveraged/inverse and covered call. The categories have very different objectives and performance patterns from one another.
- Leveraged single-stock ETFs borrow money to dial up their exposure to the reference stock. Most leveraged ETFs amplify the stock’s daily performance by 1.25 times, 1.5 times, or 2 times. Likewise, inverse strategies may also be leveraged, in which case they use the same multipliers with a negative sign in front of them. When Nvidia NVDA soared 16.4% on Feb. 22, 2024, GraniteShares 2x Long NVDA Daily ETF NVDL gained 32.4% and GraniteShares 2x Short NVDA Daily ETF NVD lost 33.6%. These products are designed to magnify returns—for better or worse. Inverse single-stock ETFs without leverage allow investors to short a company: If the stock goes down 1%, the ETF should go up roughly 1%.
- Covered-call strategies follow two steps: 1) go long the reference stock, and 2) sell a call option against it, normally with a one-month expiration. Selling the call option generates income for investors. It also transforms the fund’s profile. The option strike price becomes a cap on upside return, while the proceeds from selling buffer the downside. That explains how YieldMax NVDA Option Income Strategy ETF NVDY gained 54.4% in 2024′s first quarter—nothing to sneeze at, but nearly 30 percentage points behind Nvidia itself. But true to form, NVDY fared better in the two months that Nvidia lost value since its May 2023 inception.
