It’s been a couple of years since the emergence of single-stock exchange-traded funds which, as the name suggests, provide exposure to a single stock. A number of these have focused on Magnificent 7 stocks, likely providing a nauseating recent experience given the disappointing start to the year for those stocks.1 Some of these ETFs even offer leveraged exposure, amplifying gains when the stocks go up but, as would be the case in 2025, deepening losses when those stocks decline.2
Single stocks tend to be more volatile than a broadly diversified portfolio. The 20th percentile return outcome in a single year for all US stocks, when viewed individually, was historically –29.4%. That’s 22 percentage points worse than the 20th percentile year for the S&P 500 Index, at –7.4%. The hole dug by the single-stock outcome requires a far greater surge to overcome: a 41.7% return to recover the initial loss, compared to just 7.9% to make up for the broad market’s decline.
Adding 2x leverage to the 20th percentile single-stock outcome doubles the trouble. The –29.4% drop would have become –58.8%, requiring a whopping 143% return to claw back the loss.
These scenarios show why broad diversification can help provide more reliable outcomes over time. A global equity market allocation includes potentially thousands of stocks, mitigating the impact any individual security can exert on one’s portfolio.
Past performance is not a guarantee of future results. Actual returns may be lower.
Return for the S&P 500 Index is based on 20th percentile of annual returns from January 1926 to December 2024. Single-stock return is based on the 20th percentile of all calendar-year US stock return outcomes from 1927 to 2024. Includes all US common stocks with full calendar-year returns from CRSP. S&P data © 2025 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved. CRSP data provided by the Center for Research in Security Prices, University of Chicago. Indices are not available for direct investment; therefore, their performance does not reflect the expenses associated with the management of an actual portfolio
This article originally appeared in Above the Fray, a weekly newsletter for Dimensional clients. It was not created, written, or produced by Ventus Wealth Management.
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