Episode 392: The Rise of ETF Slop - Rational Reminder Recap

Podcast: Rational Reminder

Published: 2026-01-15

Duration: 1 hr 15 min

Guests: Hendrik Besembinder

Summary

ETFs have evolved from straightforward, low-cost investment tools to complex, high-fee vehicles often designed to attract assets rather than deliver value to investors. This episode examines the rise of 'ETF slop' and how it misleads investors on quality and outcomes.

What Happened

ETFs, once celebrated as low-cost and sensible investment vehicles, have morphed into a crowded market of high-fee, complex offerings that often prioritize asset gathering over investor outcomes. Benjamin Felix, Dan Bortolotti, and Ben Wilson dive into the concept of 'ETF slop,' describing how ETFs have shifted from straightforward index funds into instruments designed for speculation and high fees. For the first time, the number of actively managed ETFs in the U.S. outstrips index-tracking ones, highlighting the proliferation of complex financial products.

The episode outlines how more than 1,100 new ETFs were launched in the U.S. in 2025, with over 300 in Canada, and how management fees for these new funds are comparable to those of traditional active mutual funds. The discussion reveals the 'ETF halo effect,' where investors mistakenly equate the structure of ETFs with quality, often to their detriment. As ETFs become more complex, they tend to benefit manufacturers rather than investors, especially as thematic, buffer, covered call, and single-stock ETFs become prevalent.

Thematic ETFs, for example, are often launched after the relevant theme has already shown substantial returns. This leads to underperformance post-launch, with Morningstar data revealing that only about 10% of thematic funds outperform the index over a decade. Similarly, buffer ETFs offer capped gains with partial downside protection but are criticized for their high fees and inconsistent effectiveness. Research indicates that simple stock/bond mixes outperform these complex products even during market downturns.

Covered call ETFs entice investors with high distribution yields but often underperform their underlying assets. The allure of immediate income is overshadowed by the lower total returns these funds deliver over time. Meanwhile, single-stock ETFs are identified as particularly risky, appealing to mental accounting biases with their complex, high-fee structures and volatile nature.

Leveraged and inverse ETFs further complicate the landscape by magnifying volatility. These products often underperform simple benchmarks due to the embedded costs of leverage and the challenges of daily rebalancing. Research shows that a significant percentage of these ETFs underperform the market over a one-year horizon, indicating their speculative nature.

The hosts emphasize that while ETFs can be powerful tools, their complexity often leads to poor outcomes for investors. John Bogle's skepticism of the proliferation of new and 'hot' ETF products is highlighted, warning that many of these innovations serve the interests of fund managers more than those of investors. Simple, low-cost investment products remain the most reliable choice for most investors seeking long-term success.

Key Insights