Single-stock ETFs are complex investment products that generate positive or negative multiples of the market performance of the underlying security. These features are known as leveraged and inverse exposures. A single-stock ETF differs from a more traditional ETF that combines multiple securities into a single fund to give an investor exposure to a market segment or asset class. Single-stock ETFs carry heightened risks because leveraged and inverse exposures can generate amplified or unexpected losses.
Instead of tracking a basket of stocks, single-stock ETFs only track the performance of a single underlying security and typically are not designed to be held for more than one day. The value of a single-stock ETF resets daily, adding another layer of risk to an already risky and complex product. A single-stock ETF's value can diverge significantly from the underlying stock, especially if it is leveraged or inversely leveraged.
In addition to the Risks of Trading Leveraged and Inverse Products set out above, single- stock ETFs possess other risks, in particular:
Holding a single-stock ETF is not the same as holding the underlying stock, a traditional ETF, or a non-single stock leveraged ETF. Single-stock ETFs track the performance of a single stock as opposed to a variety of stocks, which reduces diversification.
Single-stock ETFs are new to the retail investor market, and there is uncertainty as to how well they will perform over time.
Single-stock ETFs amplify the effect of price movements of the underlying individual stock and may generate amplified or unexpected losses. The volatility will be greater than holding the underlying stock itself.
Single-stock ETFs aim to provide returns over extremely short time periods (in some cases even a single day). These short holding periods mean that single-stock ETFs are geared more towards traders, rather than not long-term investors.
Returns on single-stock ETFs over periods longer than one day may diverge significantly from the performance of the underlying stock because of daily rebalancing and the effects of compounding of fees.
Fees on single-stock ETFs can be meaningfully higher than the fees on traditional ETFs.
You should understand that there is a risk you may lose your entire investment in a single- stock ETF.
You should carefully read the prospectus for any single-stock ETF before even considering an investment to attempt to better understand the risks associated with the product. Gains and losses can be magnified by the compounding inherent in the investment.
Like any ETF, single-stock ETFs may experience tracking errors, which is a deviation between the ETF's performance and the performance of the underlying stock. This could occur due to fees, rebalancing, or other factors.
Unlike traditional ETFs, single-stock ETFs can't potentially make up for poor performance of one stock with the better performance of another.
For more information, you may also read the SEC’s Statement on Single-Stock ETFs (July 2022).
The risks for trading single stock ETFs also applies for trading in spot cryptocurrency ETFs, such as spot bitcoin ETF. Before investing in a spot cryptocurrency ETF, you should carefully read the prospectus and the Virtual Currency Trading Risk Disclosure to better understand the risk factors associated with the product before making an investment decision.
For more information, you may also read the SEC’s Statement on the Approval of Spot Bitcoin Exchange-Traded Products (January 2024).
Leveraged and inverse exchange traded products are not designed for buy and hold investors or investors who do not intend to manage their investment on a daily basis. The use of leverage by an ETF increases the risk and are not suitable for all investors and should be utilized only by sophisticated investors who understand leverage risk, consequences of seeking daily leveraged or daily inverse leveraged investment results, and intend to actively monitor and manage their investment.
Important Information: Before investing in an ETF, you should read both its summary prospectus and its full prospectus, which provide detailed information on the ETF’s investment objective, principal investment strategies, risks, costs, and historical performance (if any). You can find prospectuses on the websites of the financial firms that sponsor a particular ETF, as well as through your broker. A Word About Risk: Investment returns will fluctuate and are subject to market volatility, so that an investor's shares, when redeemed or sold, may be worth more or less than their original cost. ETFs are subject to market volatility and the risks of their underlying securities, which may include the risks associated with investing in smaller companies, international securities, commodities, fixed income, and more. An ETF may trade at a premium or discount to its net asset value (NAV).
All investing involves risk, including the potential loss of principal, and there can be no guarantee that any investing strategy will be successful.