Why Did They Just Approve a Single Stock ETF?
You probably are a big fan of mutual funds and exchange traded funds. And in fact, I am willing to bet you're an even bigger fan of ETFs than you are of mutual funds. And what's not to love? We like these investments because they offer diversification. We know that when you diversify, you are taking less risk because if you own a basket of 1000 stocks, what if one of them goes broke, right? You got 999 others to protect you. So diversification is a wonderful way, the most important way that investors reduce their investment risk. And this is what mutual funds and ETFs are famous for.
But now one fund company has just launched a bunch of ETFs that each hold one stock. This is crazy. If you think about it, owning an ETF that has one stock, well, you might as well just buy the one stock. You're taking the same level of risk. These ETFs hold PayPal or Nike or Pfizer or Nvidia or Tesla. They're meant to be short-term trading vehicles. This doesn't make any sense for investors who believe in diversification and who believe in long-term investment holding.
The SEC has now approved these single stock ETFs. They've also approved single bond ETFs. While the SEC has said, okay to this, but what does Lori Schock think? She's the SEC's director of the Office of Investor Education and Advocacy. She says that these new single stock, single bond ETFs are even riskier than leveraged ETFs and inverse ETFs. Those are ETFs that borrow money or make bets that the stock market's going to fall. She said, "Investors holding these funds will experience even greater volatility and risk than investors who hold the underlying stock itself". You see, the reason is if you own a given stock, one single stock, and it goes down in value, well, you can kind of hold on to it and hope it goes up the day after that. And it'll do that -the stock will fluctuate going up and down, but these single stock ETFs reset their values every day. Meaning - if you hold on to them for more than one day, you could end up with losses that are unrecoverable. Laurie said, "Investors should be aware that if they were to hold these funds for longer than a day, the performance of the funds may differ significantly from the levered or inverse performance of the underlying stock during the same period".
Mass. AG To Investigate Brokerage Firms that Sell Single Stock ETFs
This is really crazy. It's gotten so questionable that William Galvin, the chief securities regulator and attorney general in Massachusetts, has announced an investigation into any brokerage firm that sells these things. He says that single stock ETFs are no different from gambling in a casino. He said, "Under no circumstances should an investor use these products as a long-term investment". Even SEC Commissioner Caroline Crenshaw, who was on my show a couple of months ago, said, "Because of their risks, it would be challenging for any investment professional to recommend them while honoring their fiduciary obligations".
Now, think about this for a second. This is what drives me crazy. The SEC has just said, okay to an ETF company. Go ahead, launch a single stock ETF; go ahead, launch a single bond ETF. Even though some members of the commission think this is terrifically risky and cannot be recommended by an advisor who's trying to serve as a fiduciary - meaning serving your best interests, those two are mutually exclusive. You can't serve your best interests and simultaneously tell someone to buy this. And the SEC's own director of investor advocacy says this is ridiculously risky. The SEC said yes anyway to allowing the product onto the market. And then a securities regulator in Massachusetts says any advisor who does use it is going to come under our microscope. This drives me crazy.
On the one hand, the government says, sure, we'll allow this product on the market while simultaneously saying anybody who recommends it is going to get in trouble. This is what makes it very frustrating for financial advisors. If the product is allowed on the market, then you ought to be able to use it. And if it isn't something that ought to be allowed to be used, why are you allowing it on the market? The SEC says that they are focused about consumer protection, but I don't see how the approval of single stock ETFs is protecting consumers at all. Do not invest in single stock ETFs or single bond ETFs. Do not listen to any advisor who recommends that you should, or your future could be in trouble.