The Rise of ETF Slop

ETF Slop: A Deep Dive into the Proliferation of Complex ETFs

Key Concepts:

• ETF (Exchange Traded Fund): A fund that trades on a stock exchange, offering exposure to an investment strategy.
• Index ETF: An ETF designed to track a specific market index (e.g., S&P 500).
• Actively Managed ETF: An ETF where a fund manager actively selects investments with the goal of outperforming a benchmark.
• ETF Slop: A term coined to describe the increasing number of complex, high-fee ETFs launched primarily to attract assets rather than improve investor outcomes.
• Thematic ETFs: ETFs focused on specific investment themes (e.g., AI, clean energy).
• Buffer ETFs: ETFs designed to provide downside protection with a capped upside.
• Covered Call ETFs: ETFs that generate income by selling call options on underlying stock holdings, capping potential upside.
• Single Stock ETFs: ETFs focused on the performance of a single company, often leveraged or employing covered call strategies.
• Leverage: Using borrowed capital to amplify potential returns (and losses).
• Derivatives: Financial contracts whose value is derived from an underlying asset.

I. The Rise of ETF Slop & Market Overview

The ETF landscape has dramatically shifted. While initially synonymous with sensible, low-cost investing via index tracking, the market is now flooded with actively managed ETFs. In 2025, over 1,000 new ETFs were launched in the US, with the majority being actively managed – a record. Canada saw over 300 new launches, also predominantly actively managed. Crucially, there are now more ETFs than individual stocks in the US market, and more actively managed ETFs than index-tracking ones. This proliferation is driven by regulatory changes, product successes, and a desire for firms to enter the ETF business beyond simply replicating broad market indices. The average management fee for US-listed ETFs launched in 2025 exceeded 0.7%, with 166 funds charging over 1%, a stark contrast to the sub-0.1% fees common in index ETFs. This trend represents a return to the “dark ages of investing” characterized by high fees and questionable value. As John Bogle stated, “I freely concede that the ETF is the greatest marketing innovation of the 21st century, but is the ETF a great innovation that serves investors? I strongly doubt it.”

II. Understanding the ETF Structure

An ETF is essentially a “wrapper” for an investment strategy, allowing easy access to that strategy through units traded on a stock exchange. It’s analogous to buying a pre-made fruit salad instead of sourcing and preparing the ingredients individually. While initially used for index tracking, the ETF structure can accommodate any investment strategy, including those employing leverage, derivatives, or both. This accessibility, facilitated by discount brokerage accounts, has enabled the rapid growth of complex and potentially detrimental products.

III. Four Categories of ETF Slop

The speaker identifies four product categories as particularly problematic: thematic ETFs, buffer ETFs, covered call ETFs, and single stock ETFs. These funds are characterized by complexity, high fees, and a tendency to appeal to common investor biases.

A. Thematic ETFs

These funds focus on specific economic trends (e.g., AI, metaverse, cannabis). They are attractive because they offer the potential to capitalize on “the next big thing.” However, research indicates they consistently underperform broad market benchmarks. A Financial Times-commissioned study showed the majority of thematic ETFs launched in 2025 underperformed. A 2021 academic study found an average underperformance of 6% per year in the five years following launch. This is because these themes often experience peak performance before the ETF launch, leading to inflated stock prices and subsequent declines. Morningstar data reveals that only slightly over 10% of thematic funds globally outperform at the 10-year horizon, with Canadian funds performing even worse (100% either closing or underperforming at 10 years, and 100% closing by 15 years). The cannabis sector serves as a cautionary tale, plummeting from over 60% of the Canadian thematic fund market to just 1.4% today. Investors are drawn to these funds due to attentional bias (attraction to “shiny objects”), optimism bias, and extrapolation bias (assuming past trends will continue).

B. Buffer ETFs

Marketed as offering downside protection with a capped upside, buffer ETFs aim to “smooth out the ride” for investors. Using the Beimo US Equity Buffer Hedged to Canadian Dollars ETF January as an example, the structure provides a return up to 8.1% with a 15% downside buffer. However, a 2025 paper ("Rebuffed: An Empirical Review of Buffer Funds") found that the options used to create this structure are often too expensive, transaction costs are high, and management fees are significantly higher than passive alternatives. The study showed that buffer funds frequently fail to deliver the promised downside protection, especially outside of the defined target outcome periods. Simple equity/cash combinations consistently outperform buffer funds, even during market downturns. The authors conclude that these funds are likely designed to exploit investor behavioral biases (pessimism and loss aversion) rather than improve outcomes. The BEIMO fund example has a 0.73% MER compared to 0.09% for the reference asset.

C. Covered Call ETFs

These ETFs generate income by selling call options on their underlying stock holdings, capping potential upside. They are marketed with high distribution yields, but this income comes at the cost of potential capital appreciation. The speaker’s previous videos demonstrated that covered call strategies consistently underperform their underlying equities. Investors needing income are often better off with a simple combination of dividends from an index fund and occasional portfolio sales. A cult-like following exists around covered calls, with investors resistant to evidence suggesting they don’t “print free money.”

D. Single Stock ETFs

Considered the “sloppiest” of the bunch, single stock ETFs are proliferating rapidly, have high fees, and are complex tools for speculation. They come in leveraged and non-leveraged (covered call) varieties. Covered call versions appeal to the mental accounting bias, where investors treat income and capital differently. Leveraged single stock ETFs magnify volatility and come with high costs, often hidden within swap contracts rather than explicit expense ratios. A 2025 paper by Hendrickk Besson Bender found that long-leveraged single stock ETFs underperform a simple leveraged benchmark by 0.79% per month (over 9% annually), with 0.53% attributable to fees and leverage costs. Inverse funds perform even worse. The SEC issued a warning to investors about the risks of these products.

IV. The Importance of Simplicity & Low Costs

The speaker emphasizes that complexity in investment products is generally detrimental. A 2021 paper found that derivatives, leverage, and illiquid assets are associated with poor performance and higher risk. Simple, low-cost products are the best tools for most investors. Echoing John Bogle’s philosophy, “You get what you don't pay for,” the speaker concludes that the ETF market has entered an era of “ETF slop,” where innovation prioritizes profits for financial firms over investor outcomes. Bogle warned in 2015 that the ETF wrapper itself wasn't the problem, but its use to entice investors into frequently traded, high-fee products.

V. Data & Statistics

• 2025 US ETF Launches: >1,000 (majority actively managed)
• 2025 Canadian ETF Launches: >300 (majority actively managed)
• Average US ETF Fee (2025): >0.7%
• US ETFs with Fees >1% (2025): 166
• Thematic ETF Underperformance (5 years after launch): 6% per year (average)
• Thematic ETF Outperformance (10-year horizon, global): ~10%
• Thematic ETF Performance (10-year horizon, Canada): 100% either closing or underperforming
• Buffer Fund Outperformance vs. Equity/Cash: Buffer funds generally underperform.
• Leveraged Single Stock ETF Underperformance vs. Benchmark: 0.79% per month (over 9% annually)

Conclusion:

The proliferation of complex, high-fee ETFs – “ETF slop” – is creating significant challenges for investors. Driven by innovation aimed at attracting assets rather than improving outcomes, these products appeal to common behavioral biases and often deliver subpar performance. Investors should prioritize simplicity, low costs, and a long-term perspective, remembering that the most effective investment strategies are often the most straightforward. The current environment demands increased scrutiny and a return to the principles of sensible investing championed by figures like John Bogle.