Single-stock ETFs: Approach with caution

But a new generation of ETFs proudly offers nothing of the sort. Like Canadian Depositary Receipts (CDRs), single-stock ETFs hold or at least derive their performance from just one underlying stock, often a major U.S. tech brand. In contrast to CDRs, though, this isn’t plain vanilla exposure. Many single-stock ETFs use options strategies, borrowing, or both to amplify income or deliver some form of enhanced return. These aren’t traditional buy-and-hold tools, and they come with real risks, some of which may only show up during volatile market environments.

You’ll want to do your homework before jumping in. These funds may look like familiar tickers wrapped in a convenient package, but their structure and strategy can lead to unpredictable results. Here’s what prospective Canadian investors should know about single-stock ETFs. 

The two types of single-stock ETFs

Broadly speaking, Canadian issuers have launched two kinds of single-stock ETFs. One type is built for income-seeking investors. The other is geared toward short-term traders looking to speculate on directional moves in popular U.S. stocks.

The income-focused category is dominated by Harvest ETFs and Purpose Investments. With some minor differences, both providers follow a similar playbook. These ETFs typically apply 25% portfolio leverage and write covered calls on 50% of the portfolio. That means if the ETF holds $100 worth of stock, it borrows an additional $25, similar to using a margin loan. The goal is to increase the total base generating dividends and option income.

Covered calls involve selling the right for someone else to buy the ETF’s shares of a stock at a certain price before a set expiration date. In return, the ETF receives a premium, which it distributes as income. If the underlying stock rallies above the strike price, the ETF forfeits that upside. When only 50% of the position is covered, it leaves the other half exposed to further gains.

Purpose’s YieldShares lineup uses this strategy on a range of well-known U.S. names, including Palantir, Advanced Micro Devices, Coinbase, Broadcom, UnitedHealth, Costco, Netflix, Meta Platforms, Nvidia, Microsoft, Berkshire Hathaway, Tesla, Amazon, Apple, and Alphabet. Harvest’s High Income Equity Shares lineup shares many of the same names, but adds extra ones like MicroStrategy and Eli Lilly.

On the trading-focused side of the market is Longpoint ETFs. This firm offers a lineup of SavvyLong and SavvyShort products, which provide daily two-times (2x) bullish or bearish exposure to single U.S. stocks. These ETFs are designed for tactical use, not income generation. They don’t use covered calls or pay monthly distributions. 

Instead, they’re built for traders who want to double down on short-term moves in names like Tesla, Nvidia, Amazon, Alphabet, Apple, and Microsoft. The way these ETFs achieve leverage is also different.