The traditional view of exchange-traded funds is that they are broadly diversified portfolio building blocks. But the emergence of single-stock ETFs is upending that view.

Instead of spreading stock market risk, single-stock ETFs concentrate risk in a single company, and they usually do it with daily leverage, including derivatives that can amplify the returns by one and a half to two times.

Although single-stock ETFs have traded in Europe since 2018, the first group of such ETFs launched in U.S. markets in 2022. Since then, asset flows and trading volume have surged.

Early this month, the GraniteShares 2x Long NVDA Daily ETF (NVDL) crossed above $1 billion in assets under management, making it the largest single-stock ETF by assets.

"The recent surge in our leveraged long Nvidia product, driven by its outstanding earnings results, shows how keen investors are on having tools to take advantage of breakthrough moments in high-growth areas,” said Will Rhind, the founder and CEO of GraniteShares.

Collectively, there are roughly 45 ETFs linked to individual stocks, and these funds represent some $3.5 billion in assets under management. While that’s still tiny next to the rest of the ETF industry, it’s nonetheless impressive, especially considering the category had zero assets just a few years ago.

Understanding the Mechanics
Firms like AXS Investments, Direxion and GraniteShares are among the top providers of leveraged and inverse ETFs linked to individual stocks. Some firms offer paired ETFs, with bullish and bearish exposure on the same name. For example, Direxion offers both the Direxion Daily TSLA Bull 1.5X Shares (TSLL) and the Direxion Daily TSLA Bear 1X Shares (TSLS). This paired approach allows multi-directional trading in both up and down trending markets.

Some single-stock ETFs, just like funds based on the broader indexes, employ inverse and daily leverage mechanisms, which they can do because they use contracts known as swaps instead of owning the individual stocks directly. Such contracts allow funds to obtain magnified or inverse daily returns.

For these reasons, the performance varies greatly among single-stock ETFs. The combined effects of volatility, daily resetting and fees often yield results dramatically different from what you’d get in the performance of the underlying stock itself, particularly over longer time frames.

Tactical Moves
Leveraged ETFs use debt and derivatives to amplify gains and can aim to achieve 150% to 200% returns for investors who are bullish on a particular stock. That option also allows them to bypass other ways of achieving similar goals, say by using margin borrowing, which carries its own set of unique risks.

For defensive investors, bear ETFs linked to individual stocks offer their own appeal.

Let’s suppose an investor has a large paper profit in an individual stock like Apple, Nvidia or Tesla. While the investor might be bullish, they might also want to protect some of their paper gains. If so, they could hedge some of that risk with inverse or bear ETFs linked to the same stocks. Any decline in their stock would be offset by a gain in the inverse ETF.

This strategy could especially be useful in taxable investment accounts where the cost of an outright sale might trigger a large capital gains tax. Adding an inverse ETF to the mix would allow the investor to protect some of their paper gains, stay fully invested and avoid a big tax bill.

A Dynamic Market
Things in the single-stock ETF category change fast. For example, Direxion is changing its single-stock ETF lineup, and on April 2 the firm plans to increase the leverage point and risk level from 150% to 200% daily leverage for six bullish single-stock ETFs linked to Apple,, Alphabet, Microsoft, Nvidia and Tesla. If you decide to use this new category of ETFs on behalf of clients, stay on top of the news.

Most ETF providers have helpful tutorials and materials at their websites to educate both advisors and clients before they deploy capital.

Ron DeLegge II is the founder of and author of several books, including "Habits of the Investing Greats" and "Portfolio Architecture: A Handbook for Investors."