Massachusetts’ Secretary of the Commonwealth William Galvin has launched an investigative sweep targeting broker/dealers in the state distributing single-stock ETFs to retail investors.
Galvin sent letters of inquiry to Foreside Fund Services, IMST Distributors, ALPS Distributors and Quasar Distributors, all of which are fund distribution platforms registered as b/ds in the state. Respectively, the firms distribute Direxion, AXS Investment, GraniteShares and F/m Investments product lines.
A single-stock ETF tracks the performance of one particular stock as opposed to following the peaks and valleys of a certain index. These single-stock ETFs allow investors to go all in on individual companies while sticking to an ETF’s typical daily reset. (The Securities and Exchange Commission previously warned that complex products committed to resetting each day may not be suited for retail customers hoping to hold products for the long term during volatile market swings.)
Galvin called them “risky products … with no diversity cushion whatsoever,” in a statement.
“For nearly all Main Street investors, there is no difference between investing your money in single-stock ETFs and gambling with that money at a casino,” he said. “Under no circumstances should an investor use these products as a long-term investment.”
Earlier this summer, the SEC approved single-stock ETFs for investors to purchase, and some products (including eight leveraged and inverse options from AXS) quickly hit the market.
But advisors who spoke with WealthManagement.com said they had no plans to use the new funds in their portfolios and they are more appropriate for short-term institutional traders, not the retail clients they serve.
SEC Commissioner Caroline Crenshaw said in a statement that it would be “challenging” for an investment advisor to fulfill their fiduciary duty while recommending a single-stock ETF to a retail investor, while the products would nevertheless be “uniquely accessible and convenient” for self-directed investors, regardless of the risk.
Vance Barse, wealth strategist and founder of Your Dedicated Fiduciary, said while these funds may be appealing to short-term traders who are qualified to understand the inherent risks, “these should be avoided like the plague for the families we serve.”
“These are generally expensive. They can be remarkably volatile, lack diversification, and are far outside the risk tolerance and investment objectives for our clients,” he said. “And when I think about it, the road to Hades is often paved with good intentions, and for our clients, the best thing to do when it comes to these types of leveraged derivative products, may simply be to avoid the heat.”
According to Galvin’s office, the sweep will help them review new single-stock ETF offerings in Massachusetts to make sure broker/dealers aren’t recommending the products to retail investors in a manner that’s unsuitable. Responses to the letters are due by Sept. 1.
