One analyst calls it a “spaghetti cannon”: A torrent of new ETFs has pushed the number of exchange-traded funds higher than the number of US stocks.

There is no shortage of choice, and many of the new funds are in the niche category of single-stock leveraged ETFs. The total universe of US-domiciled ETFs sits at about 4,300, compared with 4,200 US stocks, Bloomberg reported. There are now more than 250 single-stock ETFs on the market, most of which are leveraged, according to data from CFRA Research. Of more than $23 billion in the leveraged single-stock ETF category, the most-targeted companies are Tesla (nearly $7.7 billion in such ETFs) and NVIDIA ($6 billion), said Aniket Ullal, head of ETF research and analytics at CFRA Research. Asset managers have also been building out other niche categories, like defined outcome and buffered ETFs.

“These categories have had some success with investors. And as a result, we’ve seen this almost ‘gold-rush’ mentality,” Ullal said. “We are still very much in the launch-and-see-what-works phase.”

Mild, Mild West

The next few years will show what works and what doesn’t. Asset managers tend to give their products two or three years to determine whether they are viable, meaning they can attract enough assets to offset the costs of running strategies. Just this month, companies have filed for dozens of new leveraged single-stock ETFs, focusing on securities ranging from stock in Starbucks and Lululemon Athletica to crypto such as Dogecoin and Sui. The 138 leveraged single-stock ETFs on the market as of the end of July represented nearly $22 billion in total assets and had brought in about $3.2 billion in net sales year to date, according to data from Morningstar.

Issuers keep prepping new strategies:

• Themes this month filed with the SEC for 16 new 2X leveraged single-stock ETFs, following a separate set of 15 such products it prepped in May.
• 21Shares filed for a pair of 2X leveraged ETFs: one focused on Dogecoin and another on Sui.
• Defiance has Leveraged Long + Income XRP and SOL ETFs in the works. It also filed for four additional Defiance Daily Target 2X Long ETFs, focused on American Eagle Outfitters, Bullish, DoorDash and Moderna.

Exchange Traded Freedom: Expect even more leveraged single-stock ETFs and specialty products before issuers slow down. “A lot of the providers have seen success in some of their very niche ETFs … There is a lower bar for profitability on these products,” said Morningstar manager research analyst Zachary Evens, who noted that a colleague calls the product strategy a spaghetti cannon, a play on the “throwing spaghetti against the wall and seeing what sticks” cliche. Most long-term investors may be better suited to low-cost passive ETFs with long track records, but there is an abundance of options, he said, comparing it to that of a supermarket. “You can buy pretty much anything you want at the grocery store,” he said. “But should you have it? That can be up for debate.”

Is it time for investors to slow their AI roll? Some experts think so.

OpenAI CEO Sam Altman made headlines last week when he described the AI craze as a bubble. Combined with ChatGPT-5’s botched rollout earlier this month and some signs of sliding among tech stocks, that prompted investors to question whether the AI boom is set to go bust in the near future, like the dot-com bubble of the late ’90s. Still, AI-focused ETFs continue to hit the market, with VettaFi listing 48 in its database, and expert outlooks are mixed. “I think it’s important to be aware of the risk,” said Claire Cantalupo, senior market analyst at InvesTech Research. “It doesn’t necessarily mean AI is going to crash tomorrow.”

Bubbling Up

There are a few things to look for when evaluating a possible bubble, Cantalupo said. One is a paradigm shift: a new technology or innovation leading to a surge in optimism and high valuations, with investors losing their sense of risk and reward. Another is “a universal belief that this time is different.” AI could, and probably will, change the world, she added, but it may also be causing inflated valuations that aren’t sustainable. During the dot-com boom, for example, equipment provider Cisco ranked as a major player, briefly becoming the world’s most valuable company with a market cap topping $500 billion. But it lost 90% of its value in the two years after the bubble burst in 2000. “The unfortunate reality is the top 10 companies in the S&P make up 40% of it by market capitalization,” Cantalupo said. “So investors who think they’re diversified by investing in index funds are actually far more exposed to just a small basket of stocks than they think they are.”

Other potential indicators that the AI boom is a bubble include:

• The fact that without the so-called Magnificent Seven stocks, which are predominantly tech-oriented, the S&P’s recent rally would be almost cut in half, according to a recent CNBC analysis.
• A recent MIT report finding that the vast majority of AI pilot programs, 95%, have no effect on P&L and no “rapid revenue acceleration.”

Artificially Sweet. The S&P 500 continues to climb because of a few tech stocks — Nvidia, Meta and others — with massive AI projects. The projects could lead to too much hype, said Brian Colello, senior equity analyst at Morningstar. Meta, for instance, has reportedly offered huge compensation packages to AI engineers that could lose value if the company’s stock falls. Still, Colello expressed optimism, based in part on continued demand for Nvidia’s products.

“Certainly, there will be businesses that fail to live up to lofty valuations and times where AI expands too quickly,” he said. “However, we don’t think these dynamics are plaguing the large AI leaders just yet.”

Advisors have increasingly been addressing clients’ cash-flow needs, favoring a curious vehicle that defies sales trends: Active mutual funds.

While cash and cash alternatives are the most commonly used (68%), active mutual funds are second (62%) and have increased in use by 9 percentage points over the past two years, according to survey data published this month by Nasdaq. Among more than 400 advisors who responded, the third most-used vehicle was passive ETFs (58%), followed by individual bonds (57%) and annuity contracts (55%). On average, advisors allocate 29% of assets under management to income-related investments.

“It’s become that ballast in a portfolio that advisors are looking for,” said Jillian DelSignore, head of retail and wealth distribution strategy in the index product management group at Nasdaq.

Actively Waiting

The fact that advisors use active mutual funds for income strategies more than passive and active ETFs shows that issuers can make up some ground, DelSignore said. While ETFs may not be the best fit in every category across income, they generally cost less than the retail and advisor share classes of mutual funds that are available outside of defined-contribution plans. “The active mutual fund uptick does really say advisors still value active management and precision in investing income — and perhaps there is an education gap on the value of an ETF,” she said.

When determining which vehicles to use in the income category, advisors told Nasdaq they turned to:

• Home office recommended lists (44%)
• Wholesaler recommendations (37%)
• Large RIAs that they follow (20%)

Dumptruck of New Products: Because the number of ETFs, particularly in niche categories like covered-call and buffered strategies, has exploded, advisors benefit from outside help to identify which products fit best for clients, DelSignore said. “Advisors are relying heavily on recommended lists, model portfolios and guidance from their issuer salespeople.”