The ETF sandbox may have gotten a little too wild.

The Securities and Exchange Commission announced last week that it will open its doors to public comments on “novel” ETF strategies in order to protect investors and foster innovation. The move is the latest by an agency that has been skeptical of highly leveraged strategies in recent months. The issue may be that the rules that worked well for some ETFs — namely Rule 6c-11, which lets ETFs operate under the ’40 Act without having to apply for exemptive relief — may not work for increasingly complex products.

“When products get too complicated, bad things happen,” said Adam Gana, a securities lawyer for Gana Weinstein. “Rule 6c-11 may be too flexible. It focuses heavily on ETF mechanics, but it does not really answer the harder question, which is: ‘Should every strategy that can technically fit inside the ETF structure be allowed to use that structure?’”

Not So Fast

With global ETF assets recently surpassing $23 trillion, the agency’s action may be a little, well … too little, too late. Either way, it’s still a step in the right direction, said Amrita Nandakumar, president of Vident Asset Management. “The SEC’s review of so-called novel ETFs is a long-overdue reality check for an industry that may have pushed the boundaries of Rule 6c-11 too far,” she said.

Specifically, issuers may have taken advantage of the agency’s 75-day rule, under which a fund’s preliminary filing may contain generic language that the issuer can revise later. After the clock runs out, some providers modify the strategy significantly in the final prospectus, meaning the SEC can’t effectively regulate it until after it has begun trading. “Not only is it worth questioning whether 75 days is enough,” she said, “but also, are we entirely sure that some of these novel ETFs really do fall under [Rule] 6c-11, or should they be categorized differently?”

Nandakumar said some ETF categories that may now attract more agency scrutiny include:

• Private credit funds, which are subject to liquidity risk and price swings.
• Complex crypto strategies, which are costly and subject to closures.
• Single-stock derivatives, which don’t hold actual shares of a company, but instead use financial instruments like swaps to track an underlying stock and are subject to compounding decay.

Product Drift: So, what now? Given the SEC’s current Trump-appointed makeup, Gana doesn’t think there will be any kind of broad ETF rollback. What’s more likely to happen, he said, is that the agency will create a sharper distinction between traditional and “novel” funds, with more liquidity requirements, naming standards and possibly limits on certain products being marketed to retail investors — but that would be an “at best” outcome.

“ETFs began as efficient, transparent vehicles for diversified exposure,” he said. “Now we are seeing products tied to crypto assets, leverage, single-stock leveraged strategies, etc. Some of those may be appropriate. But they are not all the same from an investor-protection standpoint.”

We’ll take Door No. 3.

The Comcast spinoff made waves last week, but it’s also creating new interest in exchange-traded funds that gain exposure to the telecommunications sector. The funds generally track companies like landline and mobile phone carriers, as well as mobile phone manufacturers, but AI companies are quickly splitting the segment in two. Behind Door No. 1 are traditional, mid-size telecom companies like Comcast and AT&T, which are struggling from good, old-fashioned competition. Behind Door No. 2 is the large-cap, new wave of companies like Meta, Alphabet and SpaceX, spending heavily on their AI buildout and often more volatile. It’s creating an interesting investing dynamic for advisors looking to leverage telecom.

“Meta and Alphabet are increasingly being connected to the AI trade, in or out of favor, whereas much of the rest of telecom services is slower growth,” said Todd Rosenbluth, Vettafi head of research.

The Devil Is in the Details

In sector ETFs, fund performance largely comes down to portfolio composition. The State Street Communication Services Select Sector SPDR ETF (XLC), for instance, is down more than 6% this year, with about 40% of the fund allocated to Meta and Alphabet, both of which have slid amid concerns about AI spending. By contrast, the State Street SPDR S&P Telecom ETF (XTL), which holds neither Meta nor Alphabet and instead tracks more traditional telecom services, is up almost 48% over the same period.

The largest communications ETFs, according to Morningstar data, are:

• The State Street Communication Services Select Sector SPDR ETF (XLC), the dominant player by a wide margin, with nearly $22.8 billion in assets under management. XLC is down about 6% in 2026, as of the closing bell on Thursday, according to ETF.com.
• The Vanguard Communication Services Index Fund (VOX), which comes in second, with almost $5.7 billion AUM. VOX is down 2% this year.
• The Fidelity MSCI Communication Services Index ETF (FCOM) takes the third place, with $1.7 billion AUM. The fund is also down about 2%.

The good news is that XLC brought in $337 million in net flows last week after bleeding more than $1 billion in assets over the month of June, which Rosenbluth said may signal improved investor sentiment.

Press S for SpaceX: SpaceX used to be viewed as complementary to the sector rather than competitive. But the aerospace and rocket manufacturer recently signaled bigger ambitions to expand its broadband and wireless services from rural areas into more densely populated markets, bringing it into more direct competition with traditional telecom, said Michael Hodel, Morningstar equity director. “It’s not necessarily a good hedge to own SpaceX as a way of balancing the risk around traditional telecom stocks.”

As the Architect in The Matrix Reloaded put it: “the problem is choice.”

That’s particularly the case nowadays for leveraged and inverse single-stock funds, which are coming to market en masse to take advantage of some of the hottest companies on the market. Most recently, a flurry of single-stock ETFs have launched offering exposure to SpaceX, but similar treatments have been given to NVIDIA, Tesla, Apple, Coinbase and MicroStrategy. With Anthropic and OpenAI IPOs on the horizon, we can expect to see more soon. It’s making for a complicated and confusing menu of funds for advisors looking to add leverage.

“Marketing is huge in this space,” said Steve Foy, senior vice president of trading at Tidal Group. “Awareness is really the true differentiator.”

Standing Out

These types of funds have a short-term nature, so investors aren’t committing to an investment they’ll hold beyond a day or so. But they still have to decide between funds that are essentially offering the same thing, and often, for the same price. Morningstar analyst Zachary Evens agrees that brand awareness is key for issuers jostling for a spot in an investor’s portfolio.

“There are a handful of single-stock providers that are fairly popular in the retail community, and the assets reflect that,” he added. “Brand awareness would make it potentially likely for a trader to go to one brand first over another brand just because they’re aware of this brand over another that might offer the same or competing product.” Morningstar’s database shows that there are 430 single-stock ETFs in the US, with the largest providers being Direxion, GraniteShares and AXS Investments.

But branding isn’t the only differentiator:

• Speed to market is another major factor “for everything that’s not the biggest stock story of the day,” Foy said. “It’s about being there first and being available.” That could mean offering a single-stock fund for a stock that’s not yet hotly watched, though it also means focusing on new, in-demand areas of the market.
• Volume also matters, since investors want to be invested in a tight market. Tax management can play a role, too, Foy said, since investors typically don’t want to catch a dividend when only owning a fund for a few days.

Risky Business: Single-stock ETFs can generate high returns, especially when offering 200% (or more) of the performance of an underlying stock that’s taking off. But they come with plenty of risks, including the potential for outsized losses. Evens said to also be wary of volatility decay, a phenomenon where even if the underlying stock price goes up over time, the ETF doesn’t gain the same amount and might actually lose money. “That’s why these products should not be held for extended periods of time,” he added.