ETFs are no longer synonymous with

sensible investing. The fund management

industry is launching hundreds of new

actively managed ETFs every year. And

for the first time in US market history,

there are more ETFs than there are

individual stocks. And there are more

actively managed ETFs than there are

index tracking ETFs. Many of the ETFs

being launched today have been

engineered clearly to attract assets

rather than to improve outcomes for

investors. I think what we are seeing is

best described as ETF slop. I'm Ben

Felix, chief investment officer at PWL

Capital, and I'm going to tell you why

ETF SLOP is making it harder for

investors to make good long-term

decisions and bringing us right back to

the dark ages of investing.

2025 was a big year for ETFs in the US

market. More than 1,000 new ETFs were

launched, and the majority of those fund

launches were actively managed. That is

a record for new fund launches in a

year. Here in Canada, we had more than

300 new ETFs launch. Again, with the

majority being actively managed. Not

only are many of these funds actively

managed, but they're employing complex

strategies that I think are unlikely to

be beneficial for most investors most of

the time. While low fees have been a big

part of the success of ETFs, with many

index ETFs having fees below 0.1%,

the average management fee for US listed

ETFs launched in 2025 was more than

0.7%.

And 166 of the newly launched funds have

a management fee above 1%. Index ETFs

showed investors the light. You do not

need to pay high fees for actively

managed mutual funds that trail the

market. That caused real change with

investors ditching their high fee

actively managed funds for lowcost index

ETFs. This new wave of high fee ETFs is

bringing us right back toward darkness.

Let me back up. ETF stands for

exchangeraded fund. that is a fund that

trades on a stock exchange like a stock.

The first ETF was created here in Canada

and it was an index ETF tracking

Canadian large cap stocks. An ETF is

just a wrapper that can hold an

investment strategy inside of it, making

it easy to get exposure to that strategy

by investing in units of the fund. For

example, it's much easier to buy an S&P

500 ETF than it is to buy all of the

stocks in the S&P 500 index and make the

necessary trades to match changes in the

index over time. Think of it like buying

a pre-made fruit salad instead of

shopping for washing and chopping 500

different fruits yourself. I don't even

know if there are 500 fruits. While

index funds were the first use of the

ETF structure, ETFs can hold pretty much

any investment strategy. Even complex

strategies using leverage, derivatives,

or both can be packaged up into an ETF.

This makes these complex strategies

really easy to buy for anyone with a

discount brokerage account. Index ETFs

have been wildly successful. They

swallowed a ton of the assets that used

to sit in high fee actively managed

mutual funds. That has generally been a

good thing for investors, but their low

fees and the market's domination by huge

firms like Vanguard and BlackRock mean

that if you want to get into the ETF

business, you're not going to launch

another S&P 500 index fund. In both

Canada and the US, a combination of

regulatory rule changes, regulatory

approvals, and product successes has led

to the rapid proliferation of ETFs for

all kinds of investment strategies

designed to appeal to investors who want

more than an index fund. While more

product choice might sound good, this

type of innovation has a long history of

driving profits for the innovative

financial firms, often at the expense of

the end investor. The innovation we are

seeing now in my opinion is best

described as slop. Slop has come to mean

digital content of low quality that is

produced usually in large quantities by

means of artificial intelligence. I

think we're seeing something similar

with ETFs. Huge numbers of complex high

fee products that are likely to make

investors worse off rather than better.

The huge growth in ETF slop makes it

harder for investors to find good

information and choose sensible lowcost

investments for their long-term goals.

It's like trying to find a good book in

a library where someone dumped 10,000

trashy novels on top of all the

classics. The good stuff is still there,

but now it's increasingly buried under

piles of junk. I'm going to talk about

four product categories that fit into my

definition of ETF slop and explain why

most investors should probably avoid

them. The categories are thematic ETFs,

buffer ETFs, covered call ETFs, and

single stock ETFs. Each flavor of ETF

slop has its own distinct drawbacks and

appeals to different investor biases. Of

the roughly 1,000 US listed ETFs

launched in 2025, a huge portion were

leveraged ETFs, derivative income ETFs,

and defined outcome or buffer ETFs. 27%

of the new ETFs were single stock ETFs.

Derivative income ETFs took in the most

flows. Okay, let's get to the slop.

Again, I'm going to go through thematic

ETFs, buffer ETFs, covered call ETFs,

and single stock ETFs. Thematic ETFs are

funds that focus on specific trends in

the economy. A big theme in 2025 was AI,

but past examples include themes like

metaverse, crypto, clean energy,

electric vehicles, and cannabis.

Thematic ETFs capture the imaginations

of investors. Imagine how rich you will

be if you invest in the next big thing

before everyone else realizes how big

it's going to be. The problem is that

thematic ETFs tend to launch after the

theme they represent has delivered high

returns when investor interest is high

and then goes on to deliver poor

performance often resulting in the fund

closing down. Research commissioned by

the Financial Times shows that the vast

majority of thematic exchange traded

funds which enjoyed a surge in

popularity in 2025 have underperformed

broad market benchmarks. A 2021 academic

study found that thematic ETFs

underperform by 6% per year on average

in the 5 years after launching. Even

though their themes have strong

performance before launch, before

thematic ETF launches, the stocks in the

theme have usually been rising in price

and getting positive media attention.

After the ETF launches, stock prices

tend to fall back to normal levels and

media attention tends to decline. The

data in this paper suggests that

thematic ETFs launch based on themes

where investors are too optimistic and

interested. ETF companies like to launch

these funds because they can charge

higher fees and investors are eager to

buy them because they're excited about

the theme. Unfortunately, reality

doesn't match those excited

expectations. Morning Star's global

thematic fund landscape 2025 finds that

the long-term odds of picking a thematic

fund that both survives and outperforms

global equities is very low. This chart

from Morning Stars report shows that

just over 10% of thematic funds globally

outperform at the 10-year horizon. The

data for Canadian listed funds is even

more damning with 100% of Canadian

listed thematic funds either closing or

underperforming at the 10-year horizon

and 100% of funds closing by the 15-year

mark. The underlying reasons for this

poor performance are something I've gone

into a lot of detail on in other videos.

I'll link to them in the video

description. The short version is that

all the exciting growth you expect from

a theme is usually already reflected in

high stock prices for stocks related to

that theme. As reality unfolds,

expectations tend to settle down and

stock prices tend to fall. Cannabis was

a crazy extreme example. When Canada

legalized cannabis, investors saw the

potential for a massive market to open

up and they piled dollars into thematic

funds built around that cannabis theme.

At the peak, cannabis funds made up more

than 60% of the Canadian thematic fund

market. Today, they make up only 1.4%.

The hot themes today based on fund flows

are security and AI. I'm not saying we

should expect the cannabis level bad

outcome for these themes which are

obviously much different and more

consequential to the broader economy.

But I do think it's important to

consider the long-term data on thematic

investing. Despite the data, investors

continue to be attracted to these

products likely due to attentional bias.

Investors are attracted to basically

shiny objects and fund managers know

which objects are shiny and optimism

bias. Investors overestimate the

probability of a good outcome. Also

extrapolation bias investors assume that

recent trends like recent past

performance will continue indefinitely.

As a general rule, I think thematic

funds belong in the pile of ETF slop

which should be avoided by most

investors most of the time. If thematic

ETFs play on investors optimism and

extrapolative beliefs, buffer ETFs play

on their pessimism. Investors tend to

overestimate the probability of negative

events and also loss aversion. Investors

feel the pain of losses more acutely

than the joy of gains. Buffer ETFs are

funds marketed as providing exposure to

the stock market with some level of

downside protection to smooth out the

ride. I'm only picking on Beimo here

because they have the clearest marketing

material that I could find. So, great

job Beimo and apologies for picking on

you. Let's take the Beimo US equity

buffer hedged to Canadian dollars ETF

January as an example. This ETF is

designed to offer the return of a US

large cap equity index up to a cap of

8.1% for the period January 20th, 2025

through January 5th, 2026 while

providing a buffer against the first 15%

of a decrease in the market price of the

index. This structure with a capped

upside and a partial cap on the downside

is one of the most common structures for

buffer funds. Here's the Beimo fund I

mentioned against a Beimo ETF of the

underlying equity over its current

target outcome period. It has clearly

done its job of capping downside up to a

15% loss and capping upside at 8%. It's

pretty cool financial engineering for

the end user of the product if they want

that very specific payoff profile. But

this setup comes with some problems as

detailed in the 2025 paper rebuffed an

empirical review of buffer funds. The

options used to structure the payoff may

be naturally too expensive. The

transaction costs of trading options may

be high and the fees managers charge may

be meaningfully higher than they would

alternatively be in a passive allocation

to the reference asset. The authors of

rebuffed show that this has become a

huge category measured by assets and

number of funds. They also show

consistent with my ETF slop thesis that

the fees are high. With the BEIMO fund

as an example, the fund has an ME of

0.73% compared to 0.09% for the

reference asset. The paper shows that

the vast majority of buffer funds in the

sample, which includes all US listed

defined outcome funds in the morning

star database with at least 24 months of

history, offer inconsistent downside

protection with realized losses

frequently exceeding what investors

might expect based on option payoff

diagrams in marketing materials,

especially outside the narrowly defined

target outcome periods. And probably the

most important finding is that simple,

lowcost alternatives like mixing

equities with cash generally outperform

buffer funds on average. and even in

draw downs. This raises the obvious

question of whether these buffer ETFs

are truly designed to serve investor

goals or just to cater to their

behavioral biases to sell high fee

products. The authors conclude that

their analysis adds to a growing body of

evidence that much of the innovation in

this space is superficial and engineered

more for sales than for substance. I

think Buffer ETFs are really interesting

pieces of financial engineering. They

are absolutely brilliant from a

marketing perspective since they cater

to strong investor biases that many

people are willing to pay to address. I

mean, who doesn't want shock absorbers

in their portfolio? But I do not think

they improve expected outcomes for

investors after their relatively high

fees and implementation costs. They are

likely to be detrimental to long-term

investors in most cases. If someone

thinks they need buffer ETFs in their

portfolio to sleep at night, it's

probably a sign they should review their

asset allocation, which can be expressed

using a combination of lowcost index

funds or a risk appropriate asset

allocation index fund rather than adding

a complex product with high fees to

their portfolio. Unlike a buffer ETF,

covered call ETFs and the covered call

concept more generally cap upside

returns without offering meaningful

downside protection. They do this by

selling call options on stocks held by

the fund. If the underlying stocks

perform well, the upside is capped. If

they do poorly, there's limited downside

protection from the option premium, but

the downside is mostly unprotected. I

did a series of three videos on covered

calls last year, so I'm not going to go

too deep here, but the important points

are that these funds are designed to

attract investors with their high

distribution yields, which are often

enormous. The funds are marketed on

those high yields with branding names

often including the word yield or

income. But the problem is that I don't

think investors understand that the high

distribution yield from covered call

ETFs comes with a huge trade-off on the

upside of returns. The total returns of

covered call strategies should be

expected mechanically to trail the total

returns of their underlying equities. In

past videos, I compared covered call

funds to their underlying equities and

found as expected that they underperform

most of the time, including for

investors who need income from their

portfolio. As a follow-up to the many

comments on one of these videos, I

tested funds that viewers told me were

better than the ones I looked at in my

initial video. They still look the same,

not so great relative to the underlying.

I modeled an investor who needs income

from their portfolio and asked if

covered call funds provide an advantage

over a simple combination of regular

portfolio dividends that you get from

owning an index fund and occasional

portfolio sales to fund whatever the

income need is. And I found that covered

call funds leave investors worse off

rather than better. I also showed that a

simple combination of stocks and cash

can closely match the returns of a

covered call fund without putting a hard

cap on upside returns. One of the things

that I learned from making videos about

covered calls is that this investment

strategy has a cultlike following.

People do not like to be told that

covered calls are not printing free

money. It's another example of a huge

marketing win for the ETF industry

that's likely to come at a substantial

cost to long-term investors buying the

products. Single stock ETFs might be the

sloppiest version of ETF slop. They're

being issued in huge numbers. They have

high fees. They're complex tools for

speculation wrapped in an easytouse

vehicle and they're being marketed to

retail investors. There are two main

types of single stock ETFs. One focuses

on positive or negative leveraged

exposure to individual stocks while the

other offers income generation through

covered calls on individual stocks. And

then some combine these two attributes

leverage and covered calls. Single stock

covered call ETFs come with all the same

issues as covered calls more generally

with the added risk of individual

stocks. They're marketed with names like

yield maximizer, yield shares, and high

income shares to appeal to the mental

accounting bias where investors separate

income and capital into different mental

accounts. The problem again is that

income generated by a covered call comes

at the cost of upside returns. The

result is yes, a high income yield and

lower expected total returns. Some

providers attempt to address these lower

expected returns by adding in leverage

to increase expected returns. A common

structure that I've seen is 25% leverage

on a single stock covered call strategy.

In this setup, you yes, you do have

higher expected returns due to the

leverage. You still have capp upside due

to the covered call and you get the more

extreme downside of a leverage position

with only a little bit of cushion from

the option premium plus the cost of

leverage. Some of these funds have

expense ratios, including the cost of

leverage, well above 1%. Let's also not

forget that you're still exposed to the

risk of the individual stock. Most

individual stocks have long-term returns

that trail the market, and many

individual stocks suffer from large

losses that they do not recover from in

their lifetimes. These issues become

more extreme when more leverage is

employed. Leverage single stock ETFs

magnify the already high volatility of

single stocks, and they come with their

own unique costs. As reported by Jeff

Tac from Morning Star, while traders may

expect to earn two times the daily

return of an individual stock when they

purchase a 2x single stock ETF, they

often get less than 2x on the upside and

more than 2x on the downside due to the

high cost of financing inside of these

funds. These costs don't show up in an

expense ratio because the leverage is

often coming from swap contracts. Rather

than paying interest explicitly, the

financing cost is baked into the price

of the contract. The result has been a

significant shortfall in returns of many

leveraged single stock ETFs relative to

their target daily returns. Between high

costs, high volatility, and the skewess

in individual stock returns, leveraged

single stock ETFs face a lot of

headwinds. A 2025 paper by Hendrickk

Besson Bender finds that longlevered

single stock ETFs issued since 2022

underperform a simple frictionless

leverage benchmark by an average of

0.79% per month. That is more than 9

percentage points per year with 0.26

percentage points attributable to the

cost of daily rebalancing and 0.53

percentage points attributed to

frictions like fees and the actual cost

of leverage over a risk-free borrowing

rate. Inverse leverage funds trail a

simple benchmark by 1.01% on average.

That is more than 12 percentage points

per year with 0.73 percentage points

attributable to daily rebalancing and

0.27 percentage points attributable to

frictions. Since the sample of live

leveraged single stock ETFs is pretty

small and pretty new, Bessenbinder

simulates leveraged single stock ETFs

for thousands of individual stocks going

back to 1974. He finds that at a

one-year horizon, a little more than 2/3

of hypothetical 3x leveraged single

stock funds underperform a simple

leverage benchmark. 61% underperform the

unleveraged total market index return.

And 56% have negative absolute returns

at the one-year horizon. The numbers are

slightly better, but still not great for

2x leveraged hypothetical funds. And in

both cases, there is a non-trivial

occurrence of total losses at the

one-year horizon. Inverse funds,

unsurprisingly, look much worse compared

to the market. As these products began

to hit the market, the SEC even issued a

warning to investors. Picking individual

stocks is risky enough without leverage.

The last thing investors need is a tool

that makes betting on or against

individual stocks easier to do while

charging them a premium for the

privilege. In general, complexity in

investment products is not a good thing.

A 2021 paper looks at the allowance and

use of derivatives, leverage, and

illquid assets by mutual funds and finds

that they are associated with poor

performance and higher risk. Simple,

lowcost products are likely the best

tools for most investors most of the

time. As John Bogle, the late founder of

Vanguard, said, "You get what you don't

pay for." Bogle also kind of called what

we're seeing in the ETF market today

back in 2015. He said, "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. In my

experience almost 64 years in the fund

industry, I've leared to beware of

investment products, especially when

they are new and even more when they are

hot." Bogle was concerned that while

there's nothing inherently wrong with

the ETF rapper, it was being used to

entice investors into exciting products

intended to be traded frequently, likely

to their detriment, while generating

high fees for the ETF issuer. Bogle was

right. We have entered the age of ETF

slop.