Just because it can go in an ETF doesn’t mean it should.

The Securities and Exchange Commission is opening a public comment period to discuss “innovative” or “novel” exchange-traded funds after a whirlwind of product development in recent years, both here and abroad. In a statement Tuesday, the agency said the 60-day comment window will help foster innovation, but also protect investors and the markets, and the comments could eventually factor into future regulations. The sheer number and diversity of products entering the market has made it harder for advisors to determine which ETFs belong in client portfolios, while clients can also be confused by products that raise the prospect of outsized returns.

“The ETF industry is innovating at a pace that regulators are struggling to keep up with,” a spokesperson for the ETF Institute told ETF Upside. “The SEC recognizes that the current regulatory framework for bringing ETFs to market may need to evolve to better protect investors, issuers and the agency itself.”

Growth and Innovation (and Risk)

Much of the innovation is coming from active ETFs, which have exploded in popularity over the past few years:

• Assets in active products reached nearly $400 billion by the end of 2025, according to FINTRX data.
• However, they accounted for roughly 80% of new launches.

“The commission’s request for comment seeks input from the public on how the US ETF market can continue to grow and innovate while serving investors effectively, and I look forward to reviewing feedback,” SEC Chairman Paul S. Atkins said in the release.

However, Bill Singer, a veteran Wall Street regulatory lawyer, is highly skeptical about Atkins’ message, suggesting the pace and scale of innovation in the ETF industry has driven some issuers to create “absurdly silly and questionable” products. He thinks the SEC’s comment request affords an opportunity for the regulator to wash its hands of core responsibilities and gives its leadership cover from Congressional scrutiny should leveraged products create systemic problems or even an eventual “meltdown.”

“Cynically, I suspect that the SEC wants to foster the impression that it is laboring under the so-called ‘gatekeepers dilemma,’ needing to balance innovation with protection,” Singer said. “The reality is that Atkins is a very savvy industry veteran who likely already knows what he would like to promulgate.”

Feeling Some Regret? The SEC’s comment request comes a few weeks after South Korea’s top financial regulator said that he has “regrets” about allowing leveraged single-stock funds to trade in the country, warning that the products can lead to significant volatility. The official also cited concerns regarding leveraged funds that track high-flying AI stocks, particularly for non-professionals.

The leveraged ETF market is awash with new products, targeting everything from crypto to AI and semiconductor manufacturing.

Advisors aren’t always impressed, however. Although leveraged ETF assets doubled to $220 billion from March 30 to June 3, advisors and broker-dealers face restrictions on recommending the products to their clients. Advisors have to understand their risks, make sure they align with clients’ best interests and not buy too many of them, per FINRA rules. That’s because leveraged funds can often lose significant amounts of money in flat markets since they reset daily. And sometimes those advertised yields don’t match client expectations, experts said. Advisors will want to educate themselves on new products as the ETF industry continues to innovate.

“I spend a lot of time pulling clients out of products that looked brilliant going in and quietly cost them later, and leveraged ETFs sit near the top of that list,” said Jeff Judge, a founding partner and CFP at Chesapeake Financial Planners. “For most people, the risk swamps the reward.”

Draggin’ Volatility

Although institutional investors are one of the forces behind the recent surge in demand for leveraged ETFs, there has also been strong interest from individual investors. The top financial regulator in South Korea, which had its own leverage-induced volatility scare earlier this month, said last week that over 90% of the products are held by retail investors.

“From an advisor’s perspective, leveraged ETFs are tools for trading, not vehicles for investing,” said Scott Bishop, partner and managing director at Presidio Wealth Partners. “The key risk is that many investors misunderstand what they actually own.” Some assume that a 2x leveraged ETF will net double the yield, but most leveraged funds are designed to deliver multiples of an index’s daily return, not its long-term return, he added. “Over time, daily resets, compounding, volatility drag, tracking error, and — in futures-based products — dynamics like contango and backwardation can cause returns to diverge meaningfully from what an investor expected.”

The dangers are evident in some recent leveraged product downswings:

• The Direxion Daily MSCI South Korea Bull 3X ETF (KORU) fell 42% in a single day earlier this month.
• The Defiance Daily Target 2X Long MSTR ETF (MSTX) and the T-REX 2X Long MSTR Daily Target ETF (MSTU), which track the bitcoin treasury company Strategy, are both down about 95% year to date.

What’s the Use (Case)? That’s not to say leveraged products aren’t useful. For traders with a short-term time horizon, or for sophisticated investors who can monitor their holdings closely and exit when necessary, they may fit the bill. But Bishop said most buy-and-hold investors, and his own clients, don’t fall into that category. Judge agreed: “If they insist, the only responsible way to hold it is a small satellite position with a defined exit [and] money they can lose entirely, never income they rely on, and never the core.”

Call ‘em Bruce Springsteen because they’re born to run.

Exchange-traded funds surpassed $1 trillion in inflows globally at the end of May, a breakneck pace that pushed global assets to a record $23 trillion, according to data from ETFGI. Coming off a record-breaking 2025 for launches, inflows and assets under management, hitting the $1T milestone not even halfway through the year indicates that despite global uncertainty, the asset class isn’t slowing down. Much of that growth has come from a small number of massive funds, said Deborah Fuhr, managing partner and cofounder of ETFGI. Only about 1,600 funds have more than $2 billion in assets, but they account for about 85% of total assets. “We have a very small number of big ETFs, but big is generally, say, over $2 billion,” she said. “Being over a trillion is a huge milestone.”

Heavyweight Champs

Shocking no one, the heavy hitters are still the low-cost index funds from the industry’s biggest names:

• The Vanguard S&P 500 ETF (VOO) leads the pack, with $58.8 billion in net flows so far this year, according to data from ETF.com. The iShares Core S&P 500 ETF (IVV) isn’t far behind, at $55.7 billion.
• The State Street SPDR Portfolio S&P 500 ETF (SPYM) comes in third, with $43.5 billion in fund flows in 2026.
• The Vanguard Total Stock Market ETF (VTI) and the SPDR Portfolio S&P 500 ETF (SPLG) round out the top five, with $31.7 billion and $29.5 billion, respectively.

Under the Big Top. With so many new products being launched, investors’ ETF usage is changing. “The tent has expanded to a lot more than just long-only passive investing,” said James Seyffart, an ETF analyst for Bloomberg Intelligence. “There’s a feeding frenzy for anything related to AI, semiconductors, space, you name it … as the market’s going up, we tend to see more money come into ETFs as a whole, but even when the market goes down, money still tends to come into the industry.”