Episode 392: The Rise of ETF Slop

What It Covers

Benjamin Felix, Dan Bortolotti, and Ben Wilson examine the proliferation of complex, high-fee ETFs in 2025, including thematic funds, buffer ETFs, covered call products, and leveraged single-stock ETFs that underperform simple index strategies.

Key Questions Answered

• •Thematic ETF Performance: Morningstar data shows only 10% of thematic funds outperform global equities at ten years, with 100% of Canadian thematic funds either closing or underperforming. These funds launch after themes peak, capturing investor excitement but delivering 6% annual underperformance post-launch.
• •Buffer ETF Costs: Buffer funds charge 0.73% versus 0.09% for underlying index funds while offering inconsistent downside protection. AQR research demonstrates simple equity-cash combinations outperform buffer funds on average and during drawdowns, making traditional asset allocation more effective and transparent.
• •Covered Call Trade-offs: Covered call ETFs market high distribution yields but mechanically trail underlying equity total returns. Analysis across multiple funds shows investors needing portfolio income fare better combining regular dividends with occasional equity sales rather than accepting capped upside for income distributions.
• •Leveraged Single-Stock Risks: Hendrik Bessembinder research finds three-times leveraged single-stock ETFs underperform frictionless benchmarks by 9.4 percentage points annually, with 61% trailing unlevered market returns and 56% producing negative absolute returns at one-year horizons due to daily rebalancing costs.
• •ETF Market Transformation: US markets now contain more ETFs than individual stocks and more actively-managed than index-tracking ETFs. Average management fees for 2025 ETF launches reached 0.7%, with 166 funds charging above 1%, reversing the low-cost index fund revolution.