1. Single-stock ETFs are complex investment products that pay 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.
2. Instead of reflecting 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.
3. In addition to the Risks of Trading Leveraged and Inverse Products set out above, single-stock ETFs possess other risks, in particular:
- Lack of diversification
Single-stock ETFs track the performance of a single stock as opposed to a variety of stocks, which reduces diversification. But holding a single-stock ETF is not the same as holding the underlying stock, a traditional ETF, or a non-single stock leveraged ETF.
- New products
Single-stock ETFs are new to the retail investor market, and there is uncertainty as to how well they will perform over time.
- Increased volatility
Single-stock ETFs amplify the effect of price movements of the underlying individual stocks, and may generate amplified or unexpected losses. The volatility will be greater than holding the underlying stock itself.
- Not long-term investments
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 non-long-term investors. Returns on these funds 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.
- Rebalancing and compounding risks
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.
- Higher Fees
Fees on single-stock ETFs can be meaningfully higher than the fees on traditional ETFs.
- Capital losses
You should understand that there is a risk you may lose your entire investment in a single-stock ETF. It can be risky to invest more than you can afford to loss.
- Self-directed
You should carefully read the prospectus for any single-stock ETF before investing to truly understand the risks associated with the product. Gains and losses can be magnified by the compounding inherent in the investment.
- Tracking Error
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.
- Concentration Risk
Unlike traditional ETFs, single-stock ETFs can't make up poor performance of one stock with the better performance of another.
For more information, please read the SEC’s investor bulletin available at https://www.sec.gov/investor/pubs/leveragedetfs-alert
4. This brief statement cannot disclose all the risks and other aspects of purchasing structured single-stock ETFs. You should therefore carefully study the terms and conditions of any single-stock ETFs before you decide to purchase. You agree to undertake such transactions only if you carefully consider whether single-stock ETFs is appropriate in light of your financial position, risk tolerance, investment experiences, and other relevant circumstances. If you are in doubt in relation to any aspect of this statement or the terms of single-stock ETFs, you shall seek independent professional advice before investing. You shall assume full responsibility for all the purchases and sales of single-stock- ETFs in your trading account.
