New E.T.F.s Turn the Funds’ Virtue of Low Risk on Its Head

Consider the attributes of the exchange-traded fund: low fees, less tax liabilities than a mutual fund, the ability to hold a broadly diversified portfolio in one security, lower risk and trading flexibility.

In other words, the E.T.F. is the financial embodiment of the KISS theory: “Keep It Simple, Stupid.”

Until this year.

Since midsummer, a number of E.T.F.s built around owning a single stock have emerged. Many are structured as leveraged funds, which means they use a variety of investment strategies, including swaps, futures and other derivatives, to magnify bets on the direction of an individual stock. Others are inverse funds, intended to move in the opposite direction of the day’s trading, profiting when the stock falls and falling when the stock gains. They add a layer of complexity and risk that seems at odds with the very idea of E.T.F.s.

The first of these funds debuted in July: eight from AXS Investments holding positions in Tesla, PayPal, Nvidia, Nike and Pfizer with leveraged long or short positions of one to two times the stock’s daily movement. Since then, at least 35 more E.T.F.s have been announced in filings from Direxion, GraniteShares and Kurv Investment Management targeting Boeing, Disney, Goldman Sachs, Netflix, Uber and others.

The AXS TSLA Bear Daily E.T.F. had gained 3.31 percent by Tuesday, while Tesla shares had fallen 38.54 percent.

Stock traders already use options and derivatives to make leveraged bets on the direction of a single stock. The benefit of wrapping those strategies in an E.T.F. is that the fund can simplify the process at a lower cost while avoiding short-term capital gains taxes.