“Private investments” is a catch-all term referring to financial assets that do not trade on public stock, bond or derivatives markets. They include private equity, private debt, private real estate pools, venture capital, infrastructure and alternative strategies (a.k.a. hedge funds). Until recently, you had to be an accredited investor, with a certain net worth and income level, for an asset manager or third-party advisor to sell you private investments. For their part, private asset managers typically demanded minimum investments and lock-in periods that deterred all but the rich. But a 2019 rule change that permitted “liquid alternative” mutual funds and other innovations in Canada made private investments accessible to a wider spectrum of investors.
Why are people talking about private assets?
The number of investors and the money they have to invest has increased over the years, but the size of the public markets has not kept pace. The number of operating companies (not including exchange-traded funds, or ETFs) trading on the Toronto Stock Exchange actually declined to 712 at the end of 2023 from around 1,200 at the turn of the millennium. The same phenomenon has been noted in most developed markets. U.S. listings have fallen from 8,000 in the late 1990s to approximately 4,300 today. Logically that would make the price of public securities go up, which may have happened. But something else did, too.
Beginning 30 years ago, big institutional investors such as pension funds, sovereign wealth funds and university endowments started allocating money to private investments instead. On the other side of the table, all manner of investment companies sprang up to package and sell private investments—for example, private equity firms that specialize in buying companies from their founders or on the public markets, making them more profitable, then selling them seven or 10 years later for double or triple the price. The flow of money into private equity has grown 10 times over since the global financial crisis of 2008.
In the past, companies that needed more capital to grow often had to go public; now, they have the option of staying private, backed by private investors. Many prefer to do so, to avoid the cumbersome and expensive reporting requirements of public companies and the pressure to please shareholders quarter after quarter. So, public companies represent a smaller share of the economy than in the past.
Raising the urgency, stocks and bonds have become more positively correlated in recent years; in an almost unprecedented event, both asset classes fell in tandem in 2022. Not just pension funds but small investors, too, now worry that they must get exposure to private markets or be left behind.
What can private investments add to my portfolio?
There are two main reasons why investors might want private investments in their portfolio:
Diversification benefits: Private investments are considered a different asset class than publicly traded securities. Private investments’ returns are not strongly correlated to either the stock or bond market. As such, they help diversify a portfolio and smooth out its ups and downs.
Superior returns: According to Bain & Company, private equity has outperformed public equity over each of the past three decades. But findings like this are debatable, not just because Bain itself is a private equity firm but because there are no broad indices measuring the performance of private assets—the evidence is little more than anecdotal—and their track record is short. Some academic studies have concluded that part or all of private investments’ perceived superior performance can be attributed to long holding periods, which is a proven strategy in almost any asset class. Because of their illiquidity, investors must hold them for seven years or more (depending on the investment type).
What are the drawbacks of private investments?
Though the barriers to private asset investing have come down somewhat, investors still have to contend with:
lliquidity: Traditional private investment funds require a minimum investment period, typically seven to 12 years. Even “evergreen” funds that keep reinvesting (rather than winding down after 10 to 15 years) have restrictions around redemptions, such as how often you can redeem and how much notice you must give.
Less regulatory oversight: Private funds are exempt from many of the disclosure requirements of public securities. Having name-brand asset managers can provide some reassurance, but they often charge the highest fees.
Short track records: Relatively new asset types—such as private mortgages and private corporate loans—have a limited history and small sample sizes, making due diligence harder compared to researching the stock and bond markets.
May not qualify for registered accounts: You can’t hold some kinds of private company shares or general partnership units in a registered retirement savings plan (RRSP), for example.
High management fees: Another reason why private investments are proliferating: as discount brokerages, indexing and ETFs drive down costs in traditional asset classes, private investments represent a market where the investment industry can still make fat fees. The hedge fund standard is “two and 20”—a management fee of 2% of assets per year plus 20% of gains over a certain threshold. Even their “liquid alt” cousins in Canada charge 1.25% for management and a 15.7% performance fee on average. Asset managers thus have an interest in packaging and promoting more private asset offerings.
How can retail investors buy private investments?
To invest in private investment funds the conventional way, you still have to be an accredited investor—which in Canada means having $1 million in financial assets (minus liabilities), $5 million in total net worth or $200,000 in pre-tax income in each of the past two years ($300,000 for a couple). But for investors of lesser means, there is a growing array of workarounds:
On the other hand, if you aren’t happy with any of these options, do some research, says Ulmer. “Talk to people who you think are financially savvy and ask them for referrals. Then consult with three different advisors to see what’s the best fit for you.”
Approach the provider you want to transfer to—not from
Thankfully, you don’t have to have a big meeting or emotional “break-up” conversation to initiate an RRSP transfer. Instead, contact the provider you want to transfer the funds to with the request to move over the specified accounts. They will need the names of the financial institutions where you have your other RRSPs and the account numbers to fill out the appropriate form (CRA T2033, Transfer Authorization for Registered Investments), which they will send to you to sign and return. Some providers even handle all of this online. “They’re in the business of increasing assets under management, so they want to make it easy to transfer your money to them,” says Trahair.
Opt for “in kind” transfers, where possible
The provider you’re going with will ask you if you want to move the assets over “in cash” (which means all your investment holdings will be sold before they are transferred) or “in kind” (which means all your investments go over exactly as is). Both Trahair and Ulmer say to transfer your investments in kind, so long as the receiving institution can hold those investments. (Some proprietary mutual funds, for example, may not be available to other providers.)
There are a couple of reasons why experts prefer in-kind over in-cash transfers. First, the timing may not be in your favour. If, for example, you happen to liquidate your investments right after a downturn, that money could be out of the market for a few weeks before it gets transferred and reinvested and you could miss the market rebound. In other words, you could end up breaking the first rule of investing by selling low and buying high. Second, selling your investments could trigger “back-end” fees, as explained below.
Be aware of possible deferred sales charges for “in cash” transfers
Some investment funds incur deferred sales charges (DSC) if you sell them within a specified number of years (typically seven) from the date of purchase. Those fees can be quite hefty and really add up, so you’ll want to avoid them if at all possible. Find out if you have any DSC funds and, if so, what the redemption schedule is. If you’re beyond that period, you can sell your holdings with no strings attached. If not, you can sell up to 10% of the fund every year without paying the fee, says Trahair.
“An advisor should think to check for deferred sales charges when you transfer investments to them,” says Ulmer. Otherwise, it’s a red flag that they’re failing to protect clients from unnecessary fees.
DSCs will be less of a concern in the future—Canadian regulators banned the sale of mutual funds with DSCs on June 1, 2022. However, the redemption schedules for any existing DSC mutual funds still apply.
Ask about account closing fees
Although there shouldn’t be any fees to transfer your RRSPs, you might need to pay $50 to $100 to close each old account. Make sure to ask the receiving institution if it will cover all or part of those fees. It may be willing to do so to gain your additional business.
I try to picture 84-year-old me being told by my kids that it is time to hire a financial planner. I may not be so keen myself when the time comes. Maybe I should bookmark this column.
I took over the management of my mother’s finances toward the end of her life. She seemed reluctant, but she knew it was time. I think she still saw me as her little boy even though thousands of clients and readers looked to me for advice that she was hesitant to take.
Managing your own investments to save on fees
If you expect to pay $35,000 a year on fees to invest in mutual funds, Laasya, I am speculating here, but you probably have somewhere between $1.5 million and $2 million of investments. Mutual fund management expense ratios (MERs) are embedded fees that are paid from the fund’s returns each year. They are about 2% on average but can range from under 0.5% for low-cost, passive index funds to 3% or more for segregated funds from insurance companies.
If you have $1 million or more to invest, there are discretionary portfolio managers who use stocks and bonds or proprietary pooled funds who may charge 1% or less of your portfolio value. (Discretionary means the portfolio manager makes buy and sell decisions on your behalf.)
You could certainly invest in exchange-traded funds (ETFs), and now there are plenty of simple asset-allocation ETFs (also known as all-in-one ETFs) that can be a one-stop shop for investors. Fees are in the 0.25% range.
Why self-directed investing may not be the answer
The problem with buying an ETF, Laasya, is that your kids are concerned about you investing on your own. And if they wanted to be self-directed investors, they probably would have offered to help you manage your investments. They did not. So, if you pull your investments to manage them yourself again, you may be putting your kids in an uncomfortable position, as they may potentially have to become DIY investors at some point if you’re unable to manage your own investments.
Self-directed investing may seem easy to people who are comfortable doing it. But I remain convinced that some people will never be able to manage their own investments, no matter how simple it becomes.
Have you considered a robo-advisor?
I often joke with my wife that I am very good at a short list of things in the financial planning realm, but not much else. There are plenty of things that I could probably learn to do around my house or in other aspects of life that I have no interest in learning. I would rather pay an expert.
In Canada, there are two types of investment accounts: registered and non-registered. Registered accounts are filed with the Canada Revenue Agency (CRA), the governmental body responsible for overseeing the country’s tax regulations. Investments made within registered accounts benefit from several tax incentives, including tax-free or tax-deferred growth of investments, depending on the type of account. Additionally, certain contributions to registered accounts qualify for tax deductions. More on that below.
Because of these tax benefits, you have limits on the amount of money you can contribute to each type of registered account. In contrast, non-registered accounts are basic investment accounts without any tax benefits. However, there are no contribution limits or withdrawal rules for non-registered accounts.
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Types of registered accounts in Canada
Tax-free savings account (TFSA)
Registered retirement savings plan (RRSP)
Registered education savings plan (RESP)
First home savings account (FHSA)
Registered disability savings plan (RDSP)
Purpose
Saving
Retirement savings
Saving for a child’s post-secondary education
Saving for a first home
Save for long-term financial security of a person with disabilities
Tax advantages
Tax-free growth and withdrawals, but contributions are not tax-deductible
Contributions are tax-deductible and grow tax-deferred. Withdrawals are added to income and taxed.
Tax-deferred growth. When withdrawn, gains are taxed in the hands of the student.
Contributions are tax-deductible. Growth is tax-free. Withdrawals for a first-home purchase are tax-free.
Contributions are not tax-deductible. Gains are taxed in the hands of the beneficiary.
Contribution limit
Changes annually; in 2024, the limit is $7,000
18% of earned income, up to a maximum of $31,780 in 2024. The maximum changes annually. Unused contribution room can be carried forward.
No annual maximum. Lifetime maximum of $50,000 per beneficiary (child).
Annual limit is $8,000, and lifetime limit is $40,000. Contribution room can be carried forward one year.
No annual limit. Lifetime limit of $200,000 per beneficiary.
Other key details
Newcomers get TFSA contribution room starting the year they arrive in Canada, if they are at least 18 and have a social insurance number (SIN)
RRSP contribution limits are based on earned income (based on your tax return from the previous year), not on age. So, minors can open an account too.
Federal government grant: up to $500 per year (20% on the first $2,500 contributed), to a lifetime maximum of $7,200. Some provinces offer additional incentives.
You qualify for a FHSA if you’re 18 or older, and 71 or younger as of Dec. 31 of the year you open the account. You also cannot have lived in a “qualifying home” owned by you or your spouse or common-law partner in this calendar year or the previous four calendar years.
Government grants up to $2,000 per year, depending on contributions and the family’s net income. Government bond: up to $1,000 per year based on net family income—and does not require contributions.
Types of non-registered accounts
Cash account: This is the most common form of non-registered investing account. In it, you can purchase various securities, including stocks, exchange-traded funds (ETFs) and mutual funds. (Note: A cash account is not the same as a bank account.)
Margin account: In this type of account, you can trade on leverage—which means your broker extends you credit to trade securities, allowing you to invest more money than you have in your account. Trading with borrowed money carries significant risk, as it can magnify your losses. Margin accounts are best suited to experienced investors.
Types of investments in Canada
Whether you invest in a registered or non-registered account, you can hold various types of investments across the risk spectrum:
Stocks: A stock—or a share—represents ownership in a company. If you own even just one stock of a company, you own a small part of that company. Investors can buy the stocks of publicly listed companies that trade on Canadian or U.S. stock exchanges through a brokerage. As a stock owner, you could gain in two ways: dividends and capital gains. A dividend is the portion of a company’s profits that it distributes to its shareholders, typically every quarter. Capital gain refers to what you can earn from selling a stock at a higher price than what you bought it for.
Mutual funds: Not everybody has the time or expertise to manage a stock portfolio. This is where mutual funds enter the picture. Mutual funds are pooled investment vehicles in which a professional asset manager manages a diversified portfolio of stocks or other securities for a fee. Investors buy units in these funds, giving them indirect exposure to the stocks in the fund’s portfolio.
Exchange-traded funds (ETFs): Like mutual funds, ETFs are a professionally managed portfolio of securities such as stocks or bonds. However, unlike mutual funds, ETFs are bought and sold on the stock market like stocks.
Bonds: When you purchase a bond issued by a government or a corporate entity—you’ll receive a fixed interest rate for a specified period (for example, 4% for five years). The principal amount will be repaid to you when the bond matures (meaning its term has ended). Investors can also benefit from the capital gain in a bond—if they sell their bond to someone else on the secondary market.
Guaranteed investment certificates (GICs): A GIC is a lower-risk instrument in which the investor’s initial amount invested is guaranteed, and typically an annual rate of return is also guaranteed. The exception is a market-linked GIC, which does not provide a fixed, guaranteed rate of return—its returns depend partly on market performance—but even these GICs guarantee the safety of the initial amount invested.
How to start investing
Let’s look at a few commonly asked questions from newcomers interested in investing:
“Do I need to be a permanent resident before I can invest?”
Newcomers to Canada don’t need to be permanent residents (PR) to start investing. Students and temporary workers can invest as well.
“What do I need before I can open an investment account?”
To open an investment account, you will need a social insurance number (SIN), a valid government-issued form of photo identification such as a driver’s license, and a bank account.
“Can I invest in U.S. stocks and ETFs if I’m in Canada?”
Yes. Once you have a brokerage account, you’ll be able to invest in Canadian stocks and ETFs, as well as stocks and ETFs listed on the major U.S. exchanges.
“Where can I open an investing account?”
Below, we list the different ways to start investing. Most financial institutions offer the ability to hold your TFSA, RRSP or FHSA within a brokerage account. This means you can have a registered account that functions as a brokerage account, allowing you to manage your investments directly or with an advisor.
For Baird Advisors co-chief investment officer Mary Ellen Stanek, success in fixed income isn’t about hitting home runs. Instead, it’s important to have “a really high batting average,” the 45-year industry veteran told CNBC. “We don’t think this is an asset class where you’re paid typically to hit home runs,” she said. “If you think about those big home run hitters, often they also have very high strikeout percentages — and that’s the thing we’re trying to avoid.” Instead, Stanek strives for consistency. She takes a duration neutral approach, setting the duration equal to that of the benchmark each fund follows. The team then spends its energy on areas they believe have a higher probability of adding value — looking at yield curve positioning, sector allocation and individual security selection, she said. The result has been extremely competitive track records, said Stanek, who, as co-CIO, oversees $136.5 billion in fixed income assets, as of March 31. “There’s a lot of value that we’ve created for investors with a predictable, and we would argue, a smoother ride than most products,” she said. That success can be seen in funds like the Morningstar five-star, gold-rated Baird Aggregate Bond Fund . Institutional shares, which trade trade under ticker BAGIX, have a 30-day SEC yield of 4.36% and expense ratio of 0.30%. Investor shares, which trade under ticker BAGSX, have a 4.11% 30-day SEC yield and 0.55% expense ratio. BAGSX 1Y mountain Baird Aggregate Bond Fund, investor shares Since BAGIX’s inception in 2000, it has seen a 4.74% annualized gain through March 31, 2024, according to Baird. During that time, it beat its benchmark — the Bloomberg U.S. Aggregate Index — by 66 basis points, the firm said. It also sits in the top quintile among its peers, per Morningstar . One basis point equals one-hundredth of a percentage point. From bear market baby to industry accolades Stanek’s investment philosophy has been honed throughout her years of experience. She grew up the daughter of a banker and worked college summer breaks at her father’s community bank. That experience helped her land her first post-college job in fixed income in 1979 at First Wisconsin Trust. That was just as interest rates began to move sharply higher and became very volatile. By July 1981, the yield on the 10-year Treasury hit 15.82% “We grew up as bear market babies in a hyper-risk environment, where we really had to get very, very sharp about both understanding the risk we had, and then the calibration of the opportunity versus the risk,” Stanek said. A few years later, she was promoted to chief investment officer. In 1985, she launched her duration neutral strategy and hasn’t looked back. In 2000, she was among the leaders who founded Baird Advisors. The team runs a number of fixed income funds in addition to the Baird Aggregate Bond Fund, including the Morningstar five-star rated Baird Intermediate Bond Fund. The product was one of the top performing actively managed bond funds in 2023, according to Morningstar. BIMSX 1Y mountain Baird Intermediate Bond Fund, investor shares “It’s our job to deliver both a competitive product and attractive returns, but also in a format and understandable that you can understand the risks we’re taking, and that you can feel comfortable and confident and sleep better at night,” Stanek said. Along the way, she has also collected accolades, including being named to Pensions & Investments’ 2023 Influential Women in Institutional Investing , and in 2022 being crowned outstanding portfolio manager by Morningstar. Where she sees opportunity now Stanek and her team are being very selective right now as credit spreads have gotten tighter. The allocation to Treasurys has gone slightly up in the portfolios, while credit has dipped a bit. “We’re placing new money selectively, selling when things have gotten too tight in our opinion, and being very patient, making sure we’re keeping dry powder in the portfolios for better opportunities,” she said. Within bonds, investors should consider going out the curve, she said. With the yield curve still inverted, short-term term Treasury bills are yielding over 5%. “While that’s attractive, don’t get caught,” Stanek cautioned. “At some point, the curve will right itself and short rates will drop, and then you’ll be sorry that you didn’t lock in these higher yields for a longer period of time,” she said. Stanek suggests doing annual reviews of your portfolio to determine if the asset allocation still makes sense. For those with a longer-term horizon who want to move out the curve, do it in stages, she said. “A lot of people will be immobilized if it’s that big one-time decision,” Stanek said. “Get a plan and maybe you do it in three tranches, or … a chunk every quarter, and know fully that you’re continuing to move out the curve in a methodical way.” She also sees some opportunities within securitized products, such as residential and commercial agency mortgage-backed securities , as well as AAA-rated non-agency MBS assets. “The securitized sectors that tend to be higher quality generally continue to offer pretty good value,” she said. “But very selective — we are bottom]-up investors.” Diversification is also important because as good as yields are right now, there is a long list of things that could potentially go wrong, Stanek said. It all comes down to managing risk carefully, she said. “At times, we say to ourselves, we’ve seen this movie before,” Stanek said. “If we’re not being paid to take on more risk in the portfolios, it’s OK if we continue to look for higher-quality spots to invest in and be patient and wait for better relative risk, relative value.”
Illinois Tool Works is a global manufacturer of engineered industrial products and equipment. The company’s operations are divided into seven segments: Test & Measurement and Electronics, Automotive OEM, Polymers & Fluids, Food Equipment, Welding, Construction Products, and Specialty Products. The shares are a component of the S&P 500. The company has 46,000 employees.
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Domestic investors including mutual funds and retail shareholders have significantly upped their shareholding in fintech major Paytm in the just ended third quarter this fiscal, latest shareholding data with stock exchanges showed.
Mutual Funds have increased their stake by 2.20 per centto 4.99 per centin Q3FY24 from 2.79 per centin Q2FY24, led by investment from Mirae Mutual Fund and Nippon India Mutual Fund. As a result domestic institutional investors witnessed an increase in stake by 2 per cent to 6.06 per centfrom 4.06 per cent.
The increase in interest is also seen in the massive jump of retail shareholding. On Retail investors’ shareholding has gone up up significantly by more than 4 per centto 12.85 per centfrom 8.28 per centsequentially while Non Resident Indians (NRIs) also saw an increase to 0.67 per centfrom 0.49 per cent.
Meanwhile, in the foreign portfolio investors’ (FPIs) category, the shareholding is at 18 per centand FPI Category II saw a marginal decline 0.45 per centsequentially.
In the FDI category, the shareholding by SVF India Holdings (Cayman) stands at 6.46 per centfrom 8.34 per cent while BH International Holdings sold its 2.46 per centstake.
Global and domestic brokerage firms CLSA, Jefferies, Bernstein, Axis Capital and Motilal Oswal Financial Services see Paytmposting a healthy growth in total revenue, and contribution margin, strong GMV growth, and improvement in adjusted EBITDA in the third quarter of FY24. The company is yet to announce third quarter results.
In the second quarter, the fintech giant’s revenues grew 32 per centyear-on-year (YoY) to ₹2,519 Crore led by higher subscription revenue, payments business revenue and growth in loan disbursals. Additionally, its contribution profit jumped 69 per cent YoY to ₹1,426 Crore with contribution margin up at 57 per centfrom 44 per centlast year.
It remains to be seen how popular such an ETF would be with retail investors, but more than 10 asset managers, including the world’s largest, BlackRock, are working to get their version of a spot bitcoin ETF approved. Industry participants predict that after these offerings become available, it won’t just be high-risk traders, but also retirement savers who will have more access to crypto as an asset class, either through their company 401(k) plan or through solo 401(k)s, if applicable, and self-directed IRAs.
“It’s a big step toward mainstream adoption of bitcoin and cryptocurrency. [Investors] will have more options available,” said Chris Kline, chief revenue officer of Bitcoin IRA, which allows retirement savers to invest in more than 60 cryptocurrencies within retirement accounts.
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Right now, interest in bitcoin is high. The cryptocurrency is up over 150% this year after a dismal 2022, and the spot bitcoin ETF race has helped push its value higher. But it remains an extremely volatile asset class with as many enemies as true believers.
Many major pension funds have earmarked dollars to crypto as an asset class in recent years. According to the 2022 CFA Institute Investor Trust Study, 94% of state and local pension plans had some crypto exposure. Fidelity Investments, the largest 401(k) plan administrator in the U.S., first added a bitcoin fund option in the fall of 2022 to allow employees who are comfortable with the risks and volatility of cryptocurrency to invest in bitcoin within their company-sponsored 401(k) plan.
Here’s what retirement savers who do see long-term potential in cryptocurrency as an asset class need to know about the potential use cases for spot bitcoin ETFs.
Many employers have been hesitant to offer crypto in a 401(k) based on 2022 guidance from the U.S. Department of Labor, according to industry experts.
With options to own crypto within retirement accounts such as 401(k)s and IRAs being limited, most people who own crypto today do so outside of retirement accounts. Many take a self-custody approach or use an exchange such as Coinbase or Gemini. Options are also available in nonretirement accounts at Fidelity and Betterment, for example.
Accordingly, retirement savers seeking to hold crypto assets in a retirement account typically need to find a self-directed provider that allows crypto investments, and that list is also limited. Once spot bitcoin ETFs are approved, however, expect more providers to allow them, and more options for retirement savers to invest in this fashion, say industry experts.
Assuming the SEC gives an affirmative nod to spot bitcoin ETFs, as expected, more companies might decide to offer it within their 401(k) lineup, said Steven T. Larsen, a certified financial planner and founder of Columbia Advisory Partners in Spokane, Washington.
The question is how many.
The Department of Labor doesn’t prohibit crypto in company retirement plans, but in its March 2022 guidance, “it put a pretty heavy thumb on the scale for plan sponsors considering it,” said Joshua Rubin, vice president of legal at Betterment.
“At this early stage in the history of cryptocurrencies, the Department has serious concerns about the prudence of a fiduciary’s decision to expose a 401(k) plan’s participants to direct investments in cryptocurrencies, or other products whose value is tied to cryptocurrencies,” the Department of Labor wrote in a compliance assistance release.
A spot bitcoin ETF may solve some of the hesitancies the DOL outlined, including concerns related to custody and recordkeeping and valuation, Rubin said. Still, employers may be hesitant to jump on board, at least initially, some industry watchers said.
“Employers will be very reticent about being the first ones out there to allow this,” said Tim Picciott, a CFP with Lexington, Massachusetts-based Innovative Advisory Group. “I don’t see most HR departments and plan trustees just signing on. I think it’s going to have to be a move from the workers” asking for it, he said.
While market-leading custodians such as Schwab and Fidelity don’t allow investors to invest directly in cryptocurrencies within individual retirement accounts, they have become more involved in the crypto market on multiple fronts, from venture investments both financial services giants made in a crypto trading infrastructure company to a thematic crypto fund launched by Schwab.
But to invest directly, retirement investors need to work with other providers such as Bitcoin IRA, BitIRA and iTrustCapital.
However, market watchers predict more mainstream custodians will offer spot bitcoin ETFs once they become available. “It will be everywhere once these come out,” said Larsen, who is also the founder of Defi Steward, which helps investment advisors manage digital assets for clients. “This is great for people who want exposure to bitcoin as an asset class,” he said.
There are a lot of factors that go into whether bitcoin has a place in your retirement portfolio. First and foremost, bitcoin is extremely volatile and many investors don’t have the risk appetite to invest even a portion of their retirement dollars in this emerging asset class. Investors also need to consider whether they want to hold bitcoin directly in a self-directed IRA, or solo 401(k), if applicable, or invest in bitcoin through an ETF.
With a spot bitcoin ETF, having a professional manager who is going to be diversifying access to crypto could lessen — though not eliminate — risk, said Mark Parthemer, chief wealth strategist at Glenmede, a wealth management firm.
On the other hand, there can be advantages to owning bitcoin directly through a self-directed IRA, Kline said. For instance, when it comes time to take your withdrawals after age 59½, you may be able to receive your distribution as the crypto asset itself, instead of taking the cash. When you sell the spot bitcoin ETF, the redemption would likely be for cash, he said. It’s an approach the SEC regards as safer.
In either case, there can be tax advantages for long-term investors who invest in crypto through a retirement account versus a brokerage account, Parthemer said. Assuming the investment increases dramatically, a retirement account allows investors to avoid the tax at the time of sale. If it’s in a Roth IRA and you meet the holdings requirements, the withdrawals aren’t subject to tax. By contrast, if you held it in a regular brokerage account and sold it, you could be subject to capital gains taxes at the time of sale, Parthemer said.
If your employer won’t offer a spot bitcoin ETF in its 401(k) plan, you could always ask your employer to reconsider. If the answer is no, you can still open an IRA with a provider that makes spot bitcoin ETFs available.
The new spot bitcoin ETFs will be eligible for use in all types of IRA accounts — deductible, nondeductible, Roth and SEP, as well as solo 401(k) plans, said Ric Edelman, founder of Edelman Financial Services, in an email.
“Given the outsized returns that many people expect these ETFs to produce over time, buying them inside an IRA account is going to be a common recommendation by financial advisors,” said Edelman, who wrote the 2022 book, “The Truth About Crypto” to educate advisors on the asset class and has described it as a once-in-a-generation wealth opportunity.
There are applications for an Ether ETF, but that’s likely to be approved by the SEC at a later point, Larsen said. “The spot bitcoin ETF will be the test case.”
Single-stock ETFs were first introduced in Europe in 2018. There are now nearly four dozen single-stock ETFs in the U.S., many of which track the so-called “Magnificent Seven” stocks — Apple, Microsoft, Alphabet, Nvidia, Amazon, Tesla and Meta. Other names on Morningstar’s list of single-stock ETFs include Coinbase and Alibaba.
Collectively, single-stock ETFs have about $3.3 billion of net assets, according to Morningstar.
The growth of these single-stock ETFs, which are leveraged, is not particularly surprising, given that the Nasdaq is up more than 40% this year and big-tech stocks in particular are soaring. But they’ve likely earned a long-term spot in the market.
Single-stock ETFs “are here to stay,” said Bryan Armour, director of passive strategies research for North America at Morningstar. The strategy “taps into some of the gambling mindset that exists in markets,” he said.
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Here’s what investors need to know about the growth of the single-stock ETF market and where it could be heading.
There are 45 single-stock ETFs in total, according to Morningstar, from a handful of providers including Direxion, AXS, GraniteShares and YieldMax. These ETFs follow bull, bear or option income strategies.
The largest by asset size is the Direxion Daily TSLA Bull 1.5X Shares, which tracks Tesla. In July, it became the first of its kind in the U.S. to surpass the $1 billion asset mark.
The second-largest single-stock ETF by asset size is the YieldMax TSLA Option Income Strategy ETF, which had around $841 million of assets at the end of November, according to Morningstar.
In third place by asset size is the GraniteShares 1.5x Long NVDA Daily ETF, which tracks Nvidia and has soared in a year dominated by artificial intelligence optimism and the gains for chipmakers. It had about $245 million in assets at the end of November, Morningstar data shows.
To achieve their stated returns, leveraged and inverse ETPs often use a range of investment strategies. This can include swaps, futures and other derivatives as well as long or short positions, according to a FINRA explainer.
Rich Lee, head of program and ETF trading at Robert W. Baird & Co., expects to see more single-stock ETFs with an options overlay strategy and income component. YieldMax offers several of these ETFs that seek to generate monthly income by selling/writing call options on single company stock exposures.
There is continuous appetite for single-stock ETFs, and there will continue to be innovation, combining themes and exposures under the ETF wrapper, Lee said. “It’s a way to get quick exposure with leverage.”
While the number and assets within these ETFs has mushroomed, there have been duds. Single-stock ETFs tracking Nike and Pfizer — the former whose shares are close to flat this year and the latter whose shares are down 45% — among a few others, closed down. Some stocks are too bland to get investors riled up one way or another, Armour said. If an ETF can’t get enough traction, investment managers have to decide where to focus their resources, he said. It’s something for investors to keep in mind: What’s on the market today may not be in a few months.
Performance is all over the map. The Direxion Daily TSLA Bull 1.5X, for instance, had a total one-year return of about 12% through November, but it’s up about 148% year to date through Dec. 15, according to Morningstar. The GraniteShares 1.5x Long COIN Daily ETF, which tracks Coinbase, had a one-year return through November of about 206% and returned about 488% year to date through Dec. 15, according to Morningstar.
Not surprisingly, single-stock ETFs that take a bear strategy have seen negative returns of late.
But performance over time isn’t really the point.
The market for these vehicles is mostly traders and individual investors with an extremely high risk tolerance. There are other ways to gain leverage, without needing to pay fees in the 1% range, but for some more sophisticated retail investors who don’t have experience with leverage, a single-stock ETF can be a safer option, Armour said. “It’s just not a smart long-term strategy. It’s a very costly way to gamble in the stock market.”
These vehicles are appropriate for sophisticated retail investors and professionals that are willing to take a short-term view and are willing to monitor their positions daily, said Ed Egilinsky, head of sales and distribution and alternatives at Direxion.
“These are not buy-and-hold products,” he said. “If someone is looking to buy something and not pay attention to it, this is not the vehicle.”
The U.S. Securities and Exchange Commission issued an investor warning in August, reiterating the extra risks inherent to single-stock ETFs. “Because leveraged single-stock ETFs in particular amplify the effect of price movements of the underlying individual stocks, investors holding these funds will experience even greater volatility and risk than investors who hold the underlying stock itself,” the SEC said.
“You definitely have to understand what investing or hedging investment you’re trying to achieve with these products,” Lee said. “For a lot of these leveraged products, people are using it to get intraday exposure or use it for some sort of hedging.”
Which stocks could be targeted for the next hotly traded single-stock ETF?
Success is determined in part by assets, daily volume and scale, said Egilinsky. While he declined to be specific about where Direxion is next looking to add to its single-stock ETF lineup, he did say AI is a hot area. “We’re going to let this play out over time. It’s still in its infancy stages and we’ll continue to look for single stocks that make sense for us to bring to the market.”
