New Dangers With ETFs

I saw something talked about on CNBC, and I couldn’t believe it.

According to Morningstar, there are more ETFs trading in the U.S. than stocks.

ETF stands for exchange-traded fund.

You can think of ETFs like a mutual fund with lots of stocks, but ETFs trade throughout the day like individual stocks.

As you can see in the chart above, the popularity of ETFs has exploded in the last 15 years.

But how can there possibly be more ETFs than individual stocks?

Let’s look at Apple (ticker: AAPL) as an example.

Apple, despite being just one company, is owned by almost 600 ETFs.

It’s crazy!

But it’s not the craziest part.

In the last few years, Wall Street has gotten very clever in ways to pull money from you and me.

Remember when I said ETFs hold a lot of different stocks, like a mutual fund?

Well… it isn’t entirely true.

Investment managers are making ETFs on a single, individual stock.

Why? Because they can do some really interesting things.

Direxion, a major ETF provider, has the Daily AAPL Bull 2x Shares (ticker: AAPU), which doubles the daily performance of Apple.

If AAPL goes up 2%, AAPU goes up 4%.

But if AAPL drops 2%, then AAPU falls 4%.

Direxion also has the Daily AAPL Bear 1x Shares (ticker: AAPD), which inverts the performance of Apple stock.

So if AAPL goes up 2%, AAPD falls 2%.

And investment managers aren’t stopping there.

YieldMax has the AAPL Option Income Strategy ETF (ticker: APLY), which sells options contracts to generate dividend income.

AAPL has a dividend yield of only 0.4%.

But has a dividend yield over 30% and is paying dividends every month!

Roundhill has something very similar with AAPL WeeklyPay (ticker: AAPW), which pays a dividend using options income from Apple every single week.

I’m just scratching the surface.

There are dozens of ETFs focusing on just Apple.

And Apple isn’t unique.

These ETF providers do the same thing with stocks like Nvidia (ticker: NVDA), Microsoft (ticker: MSFT), and JPMorgan (ticker: JPM).

So it makes sense why there would be more ETFs than individual stocks.

But there’s a major problem for investors like us.

These ETFs are doing some really complicated strategies to work.

And it can be very confusing!

They frequently use options, futures, swaps, and other derivatives most people don’t understand.

It’s never a good idea to invest in something you find confusing.

We need to be really careful with how we invest in ETFs.

We can’t just assume an ETF holds a group of individual stocks anymore.

And if something looks interesting, but you don’t understand it… STAY AWAY!

Individual stocks are a lot more straightforward than these complicated ETFs.

Do you want a high dividend yield? Consider a REIT like Realty Income (ticker: O) or a BDC like Ares Capital (ticker: ARCC).

Do you like large tech stocks like Apple? Then keep it simple, and just buy Apple.

Do you own any of these individual stock ETFs?