With the number of ETF strategies exploding, figuring out which ones are actually worthwhile is growing more complicated than ever.

Exchange-traded funds brought in $540 billion in assets in the first half of the year alone, and the sheer number of ETF launches is overcrowding the markets, according to ETF.com president Dave Nadig. This time next year, the number of ETFs in the US could reach 9,000, given the current pace of launches. “That makes everybody’s job really miserable,” he said during a panel at the Future Proof conference in Huntington Beach, California. “You have to wade through that to find out what’s actually worth having.”

Trendspotting

There are a few major trends impacting ETF investors heading into 2026, according to Nadig, who previously worked on some of the earliest ETFs as a managing director at Barclays Global Investors. Cheap funds are experiencing massive inflows while products with higher fees are driving revenue for a handful of lucky first-movers.

“I think we may have reached the bottom on the fee wars,” Nadig said.

Despite all the active ETF hype, most of this year’s inflows have gone to “non-traditional” funds, such as synthetic income funds, which track an index using derivative contracts instead of actually buying the securities. Other options-based income products have generated $366 million in new fee revenue this year, according to Nadig, with leveraged and inverse ETFs, as well as buffers, being the other two major successful categories. Interestingly, it’s not Vanguard, State Street and BlackRock making all the money right now, Nadig said. Issuers such as First Trust and Innovator are raking in hundreds of millions on the backs of their buffered and derivatives-based products.

“A lot of this [gets] called active management and certainly charges active management-like fees,” he said. “But it’s not the kind of active management you’re going to get from Tom Lee down at Fundstrat, where he’s picking stocks.” Since leveraged, inverse and buffered products are newer, issuers are focusing on them to gain a foothold in the market.

Cheap Date. Although the vast majority of investments are in extraordinarily cheap products, more sophisticated funds can still be worthwhile strategies for issuers, Nadig said. That’s because a smaller group of very expensive funds accounts for an outsized share of revenue: For example, JPMorgan and Toroso Investments — the maker of YieldMax ETFs — dominate the synthetic income bracket.

“It doesn’t mean that there’s no money to be made elsewhere,” Nadig said. “But the expensive stuff is just kid-in-a-candy-store money.”

Research Affiliates dropped a new ETF Friday that its founder says has the most important change to indexing in decades — and for a limited time, it’s free.

The firm’s new Research Affiliates Cap-Weighted US ETF (RAUS) uses an index that takes a different approach to stock inclusion, relying on factors like sales, cash flow, dividends and buybacks and book value. Compared with traditional market-cap weighting, that minimizes turnover and keeps the fund from buying high and selling low, Research Affiliates’ founder and chairman Rob Arnott said. “People think of active versus passive as a binary choice, and it’s not. There is no such thing as a passive investment,” Arnott said, pointing to any index fund’s turnover of 5% or or so as being the active component.

“The 5% active looks like a wild-eyed emerging growth investment manager on crystal meth,” he said. “You’re buying stocks at frothy valuations … after a period of stupendous performance.”

You Had Me at ‘Sell Low’

Typical large-cap index funds also scrap stocks after poor performance, selling them at a discount, and in some cases adding them back later, Arnott noted. The new fund tracks the RACWI US Index, which the firm launched in 2021. So far, that index hasn’t been used for any products, although the global version of it is used by a Swiss family office that accounts for most of the $1.5 billion in the strategy, Arnott said. Applying historical performance to the RACWI US Index, it would have had excess returns of 0.69% annually from July 1991 to December 2024 compared with the S&P 500, and with compounding, that would lead to 23% more wealth, according to a paper Research Affiliates posted. “I will humbly say, ‘This is the most important advance in cap weight indexing in decades,’” Arnott said.

While the ETF has a management fee of 0.15%, that is being waived for the first year, after which the net fee will likely increase, eventually leveling out in the high single-digit range, Arnott said. The 0.15% level was set because it is difficult to raise fees on an ETF, as doing so requires a shareholder vote, he noted. “We decided, while the fund is small and the costs will exceed the fees anyway, why not thank our early adopters with free fees for the first year.”

Some of the stocks in RACWI differ from those in the S&P 500:

• The largest stocks included in it, but not the S&P 500, are Marvell Technology, CRH, Cheniere Energy and Flutter Entertainment.
• The biggest names excluded from it are Palantir, CrowdStrike, DoorDash and Royal Caribbean.

Remember ‘Smart Beta’? Demand for so-called smart-beta strategies has waned in the 2020s, and anything related to that category is going to have challenges getting investors’ attention, said Dan Sotiroff, senior analyst of passive strategies at Morningstar. While the fund’s screening strategy is reasonable and elements of it look attractive, it will have to prove itself going forward, as backtesting can’t necessarily predict future performance, he said. “We want to see that that’s something that’s repeatable,” he said. “It’s reasonable to be cautious around anything that claims to generate alpha.”

The whole point of big banks is to hold clients’ money and watch it grow, so it kind of makes sense that funds tracking them are outperforming this year.

Exchange-traded funds holding large bank equities have beaten broad market indices by a significant margin year-to-date, with some up nearly 50%, according to CFRA Research data. And that momentum is expected to continue into next year, as well. “The optimism for both Europe and US banks is the view that non-fee income from capital markets activity and wealth management is going to grow,” said Aniket Ullal, head of ETF research and analytics at CFRA.

Bank Shot

Major banks and lenders around the world have been on a roll. Goldman Sachs posted its best stock-trading quarter in history in Q2 with revenue reaching $4.3 billion. Citigroup’s second-quarter net income increased 25% year-over-year. JPMorgan Chase beat its earnings on the back of increased IPO and M&A activity. All those banks’ share prices are up at least 25% year-to-date.

And it’s not just the US. European banks, in particular, have had a standout year, thanks to strong loan demand, according to Ullal. “Some key markets like Germany have been pursuing supportive policies like increasing spending on sectors like infrastructure and defense,” he told ETF Upside.

And what’s good for the goose (in this case, major banks) is good for the gander (the ETFs tracking them), per CFRA data:

• iShares MSCI Europe Financials ETF (EUFN) is up more than 48% this year and has taken in nearly $1.6 billion as of the end of August. This is the first time in the past five years it has outperformed iShares Core S&P 500 ETF (IVV).
• Themes Global Systemically Important Banks ETF (GSIB) is up roughly 45% with flows of almost $14 million. European banks account for all five of the largest YTD return contributors.
• Invesco KBW Bank ETF (KBWB) has risen about 20% and taken in more than $1.5 billion.

Still Stressing. Regional banks, on the other hand, haven’t been as lucky, performing well in the recent stress tests, but lagging peers on YTD returns, according to Ullal. And that can be seen in a fund like the SPDR S&P Regional Banking ETF (KRE), which has trailed the S&P 500 and experienced nearly $1.2 billion in outflows this year.