The ETF market has seen its share of pile-on product innovation —see the spread of currency hedging into the smallest of slices of the foreign exchange market, or the land-grab of index exposure that gave us the HealthShares line of pharma ETFs and one focused on nephrology (both flatlined). We’ve even seen one that let investors bet on businesses based in the Nashville, Tennessee, area for a 49-basis-point fee.
But the newest trend du jour in the ETF market has the potential to detonate a bomb of product filings and launches that could explode the old measurements for ETF industry growth and put some advisors in the predicament of seeing an array of ETFs in which they would not – or cannot – invest.
We are talking about the single-security ETF market, in which managers aim to provide investors leveraged or inverse exposure to a specific stock or access to a security not available for sale on a U.S. exchange. Providers of such products say they democratize access to tools that let investors express strong views on specific stocks. (Even without built-in leverage within products, investors can short ETFs, put call options on them or stay long.) In some cases, it may be the only way to access certain stocks or bonds, without the hassle of setting up foreign brokerage accounts or paying a broker to go out and buy a bond from a dealer.
So far, the number of single-stock ETFs available for sale is small: 22 such products have debuted as of Sept. 15, according to Morningstar Direct data. Another three ETFs have launched that invest in a single issue of Treasury notes. Combined, that’s less than 10% of the 294 ETFs that have launched in that time period.
But it remains early days. The first single-security ETF launched in July and there are already dozens of similar strategies poised to launch in the coming months. At one point there were roughly 200 single-security ETFs in registration with the SEC, according to Bloomberg data. As of last week, 129 such products were in the works for foreign stocks alone, the data provider reported. The single-stock ETF filings come from established leveraged and inverse providers like Direxion and GraniteShares, as well as newcomers such as the firm Kurv Investment Management.
A large chunk of those ETFs are not leveraged or inverse, but instead simply serve as access points to stocks traded on foreign exchanges such as Samsung and Saudi Aramco. The argument for such products is that, absent a company issuing depository receipts to trade in the United States, U.S. retail investors are shut out while institutional buyers get a piece using prime brokers.
Regulators, however, don’t seem to be buying it, at least not fully. Roundhill Investments, one of the firms proposing single-stock foreign ETFs, abruptly pulled its application to register 33 such products late Monday.
Securities and Exchange Commissioner Caroline Crenshaw in July described the risks inherent in single-stock ETFs, broadly, as “perhaps greater” than the leveraged and inverse products that drew such regulatory heat several years back. Crenshaw warned advisors would be hard-pressed to recommend such products and fulfill their duties under Regulation Best Interest.
Further, many of the large wirehouses and broker-dealers have placed restrictions on who can buy leveraged or inverse products – if they allow anyone at all. The chatter about additional sales practice rules placed on so-called “complex ETFs” also could keep advisors away.
Advisors by no means are being shut out from ETF product development writ large, but single stock ETFs may be one of those examples where the lofty goals of democratizing assets don’t exactly line up with the realities of managing other people’s money.