Single-Stock ETFs Move Closer to Market Despite SEC Concerns

AXS Investments became the first company to pass a regulatory milestone to provide leveraged single-stock ETFs in the U.S., even as Securities and Exchange Commission officials criticized such products as potentially posing serious risks for investors and the markets.

The company filed paperwork with the agency Monday in preparation for offering exchange-traded funds holding complex derivatives tied to the performance of stocks like Tesla Inc. and Nvidia Corp. It wasn’t immediately clear when the ETFs might hit the market, but the filing indicates AXS now has regulatory approval to proceed.

Retail investors and private funds alike have flocked to derivatives-powered products this year amid market turmoil to bet on declines and to hedge against various stocks. Several issuers have been racing to provide the first leveraged single-stock ETFs in the US. Such products are already traded on European exchanges.

Existing leveraged and inverse ETFs in the U.S. target an index or a fund and use derivatives to amplify returns or reverse performance. They were falling out of favor after getting caught up in past market blowups, but they’ve been making a comeback.

AXS cautioned in its filing Monday that the funds “are not intended to be used by, and are not appropriate for, investors who do not intend to actively monitor and manage their portfolios.”

The products allow investors to make leveraged bets for or against single companies. That means traders could reap huge rewards based on multiples of a daily rise or fall, but could also lead to hefty losses.

In its initial February filing, AXS proposed funds that would offer double the daily gain or inverse return on single companies. But the new filing shows it now plans for some of the funds to offer less than two times leverage. For example, the TSLA Bear Daily ETF would offer the daily inverse return of the electric vehicle maker, and the TSLA Bull Daily ETF would offer 1.1 times the daily gain.

Cautionary Statements

SEC Commissioner Caroline Crenshaw, a Democrat, cautioned investment advisers about the products, and called for the SEC to adopt new rules that would specifically address the potential risks.

“It would likely be challenging for an investment professional to recommend such a product to a retail investor while also honoring his or her fiduciary obligations,” she said in a statement.

The agency’s director for the Office of Investor Education and Advocacy, Lori Schock, also sounded a note of caution on Monday, saying in a statement that “investors holding these funds will experience even greater volatility and risk than investors who hold the underlying stock itself.”

Neither official expressly called out AXS by name. AXS didn’t immediately respond to a request for comment on the officials’ statements.

Including AXS’ planned funds, there have been at least 82 single-stock ETFs proposed this year. Other issuers hoping to list such products include GraniteShares, one of the largest providers of single-stock exchange-traded products in the world, and Direxion, one of the biggest issuers of leveraged ETFs.

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