The rise of complex, high-fee exchange-traded funds is undoing decades of progress in investor education and outcomes.
The Dilution of a Great Innovation
For decades, the exchange-traded fund (ETF) was synonymous with sensible, low-cost investing. It was the vehicle that allowed ordinary investors to ditch high-fee mutual funds in favor of broad market indexing. But the landscape has shifted dramatically. In 2025, the US market saw a record-breaking launch of over 1,000 new ETFs, the majority of which were actively managed. For the first time in history, there are more ETFs than individual stocks, and more active ETFs than index-tracking ones.
This proliferation represents what I call 'ETF slop.' Much like the low-quality, AI-generated content flooding the internet, the fund management industry is churning out high-volume, low-substance products engineered to attract assets through marketing rather than merit. While the original index ETFs charged fees below 0.1%, the average management fee for the class of 2025 exceeded 0.7%. We are witnessing a regression into a new dark age of investing, where the simplicity of the index is being buried under piles of expensive, complex junk.
The Trap of Thematic Excitement
Thematic ETFs—funds focused on trendy sectors like AI, the metaverse, or cannabis—are the most visible form of slop. They appeal to our 'attentional bias,' drawing us toward shiny objects that have recently dominated the news cycle. However, the timing of these launches is almost systematically detrimental to investors. Research shows that thematic ETFs tend to launch after a sector has already seen a massive run-up in price. Once the fund is live and the hype settles, prices frequently revert to the mean.
The data is damning. A 2021 study found that thematic ETFs underperform the broad market by an average of 6% per year in the five years following their launch. In Canada, the track record is even bleaker: 100% of thematic funds either closed or underperformed over a ten-year horizon. The cannabis craze serves as a cautionary tale; at its peak, these funds represented 60% of the Canadian thematic market, a figure that has since collapsed to just 1.4%. Investors are essentially paying a premium to buy at the top.
The High Cost of Protection
If thematic funds play on optimism, 'buffer' ETFs play on fear. These products use options to offer a 'defined outcome,' such as capping upside gains at 8% to protect against the first 15% of market losses. While this sounds like a sophisticated way to manage risk, it is often an expensive exercise in futility. The internal transaction costs of trading options and the management fees—often seven times higher than a standard index fund—eat away at the very protection they promise.
Academic reviews of these 'defined outcome' funds show they frequently fail to provide the protection advertised, especially outside of narrow windows. More importantly, a simple, low-cost combination of equities and cash generally outperforms buffer funds, even during market drawdowns. These products are brilliant marketing tools because they cater to loss aversion, but they rarely improve expected outcomes. If you need a buffer ETF to sleep at night, the issue is likely your asset allocation, not a lack of complex financial engineering.
The Illusion of Free Income
Covered call ETFs have developed a cult-like following by promising high distribution yields. By selling call options on their holdings, these funds generate cash that is paid out to investors, often branded with enticing names like 'Yield Maximizer.' The psychological lure is 'mental accounting,' where investors see a high dividend and ignore the erosion of their principal. However, there is no such thing as free money in the options market.
By selling the upside, these funds mechanically trail the total returns of the underlying stocks they hold. In my analysis, even investors who specifically need income are better off owning a total market index and selling shares as needed. The covered call structure leaves the investor exposed to almost all the downside while strictly limiting the gains during a recovery. It is a strategy that trades long-term wealth for the short-term comfort of a monthly check.
The Danger of Single-Stock Speculation
Perhaps the most egregious form of ETF slop is the single-stock leveraged ETF. These funds allow retail investors to bet on or against a single company with 2x or 3x leverage. While they aim for a multiple of a stock's daily return, the reality is often far worse due to 'volatility decay' and hidden financing costs. Because these funds must rebalance daily, the friction of trading and the cost of swap contracts create a massive drag on performance.
Simulations of these products going back to 1974 show that over a one-year horizon, more than two-thirds of 3x leveraged single-stock funds underperform a simple leveraged benchmark, and over half suffer absolute negative returns. The SEC has even issued warnings about these products. Picking individual stocks is difficult enough; doing so through a high-fee, leveraged vehicle that charges a premium for the privilege of gambling is a recipe for financial ruin.
Returning to the Fundamentals
Complexity in investment products is rarely a gift to the investor; it is almost always a gift to the issuer. As John Bogle, the founder of Vanguard, warned years ago, the ETF is a great marketing innovation that does not always serve the public. The industry has realized that it cannot make much money selling 0.03% index funds, so it has pivoted to selling 'slop'—complex, high-margin products that cater to our worst behavioral instincts.
The path forward remains the same as it was during the first ETF revolution. You get what you don't pay for. Success in the long term does not come from finding the right theme, the perfect buffer, or the highest yield. It comes from radical simplicity, low fees, and the discipline to ignore the noise of the marketplace. In an era of ETF slop, the most sophisticated move an investor can make is to remain boring.