The Leveraged Single-Stock ETF Gold Rush

One analyst calls it a “spaghetti cannon”: A torrent of new ETFs has pushed the number of exchange-traded funds higher than the number of US stocks.

There is no shortage of choice, and many of the new funds are in the niche category of single-stock leveraged ETFs. The total universe of US-domiciled ETFs sits at about 4,300, compared with 4,200 US stocks, Bloomberg reported. There are now more than 250 single-stock ETFs on the market, most of which are leveraged, according to data from CFRA Research. Of more than $23 billion in the leveraged single-stock ETF category, the most-targeted companies are Tesla (nearly $7.7 billion in such ETFs) and NVIDIA ($6 billion), said Aniket Ullal, head of ETF research and analytics at CFRA Research. Asset managers have also been building out other niche categories, like defined outcome and buffered ETFs.

“These categories have had some success with investors. And as a result, we’ve seen this almost ‘gold-rush’ mentality,” Ullal said. “We are still very much in the launch-and-see-what-works phase.”

Mild, Mild West

The next few years will show what works and what doesn’t. Asset managers tend to give their products two or three years to determine whether they are viable, meaning they can attract enough assets to offset the costs of running strategies. Just this month, companies have filed for dozens of new leveraged single-stock ETFs, focusing on securities ranging from stock in Starbucks and Lululemon Athletica to crypto such as Dogecoin and Sui. The 138 leveraged single-stock ETFs on the market as of the end of July represented nearly $22 billion in total assets and had brought in about $3.2 billion in net sales year to date, according to data from Morningstar.

Issuers keep prepping new strategies:

• Themes this month filed with the SEC for 16 new 2X leveraged single-stock ETFs, following a separate set of 15 such products it prepped in May.
• 21Shares filed for a pair of 2X leveraged ETFs: one focused on Dogecoin and another on Sui.
• Defiance has Leveraged Long + Income XRP and SOL ETFs in the works. It also filed for four additional Defiance Daily Target 2X Long ETFs, focused on American Eagle Outfitters, Bullish, DoorDash and Moderna.

Exchange Traded Freedom: Expect even more leveraged single-stock ETFs and specialty products before issuers slow down. “A lot of the providers have seen success in some of their very niche ETFs … There is a lower bar for profitability on these products,” said Morningstar manager research analyst Zachary Evens, who noted that a colleague calls the product strategy a spaghetti cannon, a play on the “throwing spaghetti against the wall and seeing what sticks” cliche. Most long-term investors may be better suited to low-cost passive ETFs with long track records, but there is an abundance of options, he said, comparing it to that of a supermarket. “You can buy pretty much anything you want at the grocery store,” he said. “But should you have it? That can be up for debate.”