Are single-stock ETFs the future?

Unlike highly leveraged U.S. counterparts, COO insists world's first yield-focused single-stock ETFs were designed for advisors

Are single-stock ETFs the future?

Last week, Purpose Investments revealed its plans to once again be at the forefront of investment innovation.

Extending a record that includes Canada’s first high-interest savings account ETF and the world’s first spot bitcoin ETF, the firm has filed a preliminary prospectus to launch the Purpose Yield Shares ETFs, which will be the first yield-focused single-stock ETFs in the world.

“If you think about it, they're really not providing anything new,” says Vlad Tasevski, COO and head of Product at Purpose Investments. “The strategies we’re using here aren’t exotic or black-box. We’re just packaging them in an elegant way.”

According to Tasevski, the new yield-shares ETFs were designed to address a widely shared need among investment advisors. While they may want to get exposure to single stocks that they pick themselves or are recommended by their head office research desks, Tasevski says going further than long-only exposure to specific stocks is difficult to achieve for the average advisor.

“For advisors, it’s not that easy to actually overwrite calls and use modest leverage to augment the income,” he explains. “Trying to achieve that, account by account, is very tedious.”

The initial suite of Purpose Yield Shares ETFs will provide exposure to 10 U.S. mega-cap names including Apple, Alphabet, Exxon Mobil, and JP Morgan Chase. Rather than totally replace direct equity holdings of those companies, Tasevski says the new yield shares ETFs are designed as a way for advisors to complement their holdings of single stocks.

Today’s advisors are also able to get stock-specific allocations to U.S. names through Canadian depositary receipts or CDRs, which were first introduced by CIBC last year. Like CDRs, each of the yield shares ETFs also offers currency-hedged exposure to its underlying U.S. stock, but Purpose’s products include covered calls and modest leverage to modestly enhance their potential yield.

“These yield shares ETFs will also provide options to investors seeking tax-loss selling opportunities,” Tasevski adds. “In a year like this one when markets have been battered, tax-loss harvesting is more important than ever.”

In July, single-stock ETFs were first introduced to the U.S. retail investor market. But those products differ from what Purpose has put together, Tasevski explains, because they have higher levels of leverage ranging from 1.5x to 3x exposure.

“Inverse and leveraged funds have been most commonly misunderstood products in the past,” he says, noting how features like daily rebalancing could negatively impact returns in a buy-and-hold strategy. “Purpose is not in the business of providing daily trading vehicles.”

After launching the initial suite of 10 yield-shares products, Purpose hopes to expand the offering with more large names in the coming months as they seek to expand optionality for investors and advisors.

“We’re very excited. Canadian investors and advisors will be the first ones to access this,” Tasevski says. “We believe that this will create its own product category over the long term.”

A preliminary long-form prospectus relating to the ETFs (the “Preliminary Prospectus”) has been filed with the Canadian securities commissions or similar authorities. You cannot buy securities of the ETFs until the relevant securities commissions or similar authorities issue receipts for the final prospectus of the ETFs. Copies of the Preliminary Prospectus may be obtained from Purpose. 

Commissions, trailing commissions, management fees and expenses all may be associated with investment fund investments. The prospectus contains important detailed information about the investment fund. Please read the prospectus before investing. There is no assurance that any fund will achieve its investment objective, and its net asset value, yield, and investment return will fluctuate from time to time with market conditions. Investment funds are not guaranteed, their values change frequently, and past performance may not be repeated.