Hundreds of new funds launched, experts warn of risks

Hundreds of exchange-traded funds have been launched to allow investors to amplify their bets that a single company’s stock will go up or down.

This category of single-stock ETFs currently has a total of about 377 products in the U.S., with 276 products launching in 2025 as of Dec. 9, according to Morningstar Manager Research Analyst Zachary Evens.

These funds could provide access to the most “exciting and largest technology companies” including: Nvidia, tesla, apple or Amazonsaid Evens.

But the fund also carries “significant risk that bets will be off,” he said.

Investing in the stock of a single company provides one-time exposure, whereas single-stock ETFs promote a strategy that magnifies the bet on the profit or loss of a single ticker symbol. These may include swaps, futures and other derivatives.

Leveraged single stock ETFs advertise greater short-term returns. If stock prices rise by 2%, the ETF could give you a return of, say, 4%, or some other multiple depending on your strategy.

Inverse ETFs provide investors with returns that are the opposite of stock returns. For example, if a stock rises by 1%, the ETF may fall by the same percentage.

Covered call ETFs also allow investors to sell call options on a company’s stock price while betting that the stock price will rise, with the purpose of generating income for the investor.

They are designed to achieve these results and recalculate their exposure on a regular basis, sometimes even daily.

But despite the funds’ promises that their strategies could generate returns for investors, experts say buyers should be wary of the risks, with the SEC issuing a similar warning in 2022 when these products first appeared.

SEC Commissioner Caroline Crenshaw wrote at the time that over the long term, investors’ returns could be “significantly lower than expected based on the performance of the underlying stocks,” and even more so in volatile markets.

As of Nov. 30, cumulative flows in individual stock ETFs were about $44 billion, based on data from Morningstar Direct. Year-to-date flows are $22.3 billion.

But again, as of Nov. 30, the fund had $41.2 billion in assets under management.

“They’re actually taking in more capital than they currently have,” Evens said. “Overall, these performances have not been positive, and for many investors, their experience is probably not positive either.”

Evens said the individual stock ETF fund market is top-heavy. He said only seven funds each have more than $1 billion in assets, while 303 funds each have less than $100 million in assets. Notably, 29 people each made less than $1 million.

The funds with the top net assets as of November are Direxion Daily TSLA Bull 2x Stockabout $6.4 billion, according to Morningstar data. This was followed by the GraniteShares 2x Long NVDA Daily ETF with about $4.3 billion and the YieldMax MSTR Option Income Strategy ETF with about $1.9 billion.

In general, many of the products will not gain significant market share, Evens said. But that possibility, coupled with high fees, presents a lucrative opportunity for providers, he said.

As of the end of March 2024, the average annual fee for a single-stock ETF investor was 1.07%, according to Morningstar, which is three times the cost of the average U.S. fund.

Additionally, Evens says there are “nearly infinite iterations” of possible single-stock ETF strategies based on thousands of U.S. stocks and a variety of approaches, including derivatives and swaps.

“The hope is that they keep launching these and eventually strike lightning in a bottle,” Evens said.

More investors are asking about single stock ETFs, especially related stock ETFs. tesla, Nvidia, Amazon and applesays Ashton Lawrence, a certified financial planner, director and senior wealth advisor at Mariner Wealth Advisors in Greenville, South Carolina.

He said much of that interest is being driven by past profits and investors looking to take advantage of future returns.

Lawrence said these types of ETFs could be suitable for “very small satellite positions” for very short-term investors.

However, he said the strategy is generally not suitable for people who are investing for the long term in retirement, are looking to reduce volatility, or are already concentrated in single-stock positions.

“It’s really just a tool, but any tool can lead to a bad experience if applied to the wrong situation,” Lawrence says.

Because ETFs are reset daily and leveraged, their performance can deviate significantly from the stock price over time, Lawrence said. So while investors might expect that if they market an ETF with twice their exposure, they’ll get a 200% return on the underlying stocks that rose 100% over three years, that’s not necessarily the case, he said.

Evens said investors should keep in mind that these funds are trading tools.

“These are speculative products and are not meant to be held for long periods of time,” Evens said, adding that they are instead meant to be held for a day or two, or even just a few hours during the day.

Still, risks exist in the short term. A recent Morningstar study found that leveraged single-stock ETFs don’t always deliver the returns promised over more than one day. Additionally, some of the top leveraged single stock ETFs fail to achieve their target returns on average.

One reason these strategies face challenges is lower volatility. If the stock price drops 10%, you would need a gain of 10% or more to even out, but the value of your investment can decline over time due to leverage and volatility, Evens said.