By Jason Zweig
Cheap, reliable exchange-traded funds are a basic building block of investing. Increasingly, however, ETFs are becoming a high-cost conduit for concentrated, risky or weird strategies.
So investors need to start approaching ETFs with caution. All too many of the newer ones are investment junk food. And, just as with candy, cookies or french fries, filling up on them can be bad for you.
This year, 466 ETFs have been launched through mid-May, amassing $62.3 billion in assets, according to Morningstar. Their annual expenses average 0.69%.
That's more than 20 times those of many traditional index funds. Six out of every 10 new ETFs carry annual expenses of at least 0.5%, and a fifth charge at least 1% annually.
Only 16% of the newest ETFs are index funds. At more than a quarter of this year's launches, results depend on the performance of a single stock, commodity or other asset -- the opposite of diversification, or what I've called deversification. Dozens specialize in cryptocurrencies, often seeking to double the daily return of digital assets.
To see just how far ETFs have drifted from the investment mainstream, look at the Tuttle Capital UFO Disclosure ETF. It was launched -- and I do mean "launched" -- in February.
The fund seeks to buy stocks that could benefit from "government disclosure, confirmation, or exploitation of advanced technologies" related to "non-human intelligence."
Is it worth paying 0.99% a year for an ETF tailor-made for E.T.? Portfolio manager Matthew Tuttle says he was inspired to create the fund by videos that purport to show alien spacecraft moving across the skies in anomalous ways.
The fund, he says, is based on "the secret gap," a belief that "elements of the government are always 20 to 30 years ahead on technologies." Its holdings could benefit by commercializing "free energy" or other novel forms of propulsion seemingly used by UFOs, says Tuttle.
"If this technology exists and becomes public, it is a gamechanger more than the internet or AI," he adds. "I don't need aliens to be real for my thesis to work, but it's a lot more fun if they are."
So far, the fund has only $2 million in assets, but "I am way early on this idea," says Tuttle.
Another unorthodox fund is the Nicholas Bitcoin and Treasuries AfterDark ETF, which began trading in April. With $30 million in assets, it charges 0.97% annually. For that, you get exposure to bitcoin's returns -- but only when the stock market is closed.
Each day from Monday through Friday, the fund starts out exposed to bitcoin, flips to Treasury bills or cash at 9:30 a.m. Eastern time, then darts back into bitcoin at 4 p.m. (It stays in bitcoin over the weekends and on holidays.)
The ETF's strategy, says David Nicholas, one of the portfolio managers, is based on data indicating that bitcoin earns higher returns outside the U.S. stock market's trading hours.
According to Bespoke Investment Group, bitcoin (as measured by the iShares Bitcoin Trust ETF) returned 65.2% from January 2024 through this week, if you held it continuously. If, however, you held it only overnight, you would have earned 213.8%. Both figures ignore trading costs and taxes.
"Basically, all of the returns have come in the overnight hours," says Nicholas. So the fund will overhaul its entire portfolio twice each trading day.
In the six weeks since its inception, the AfterDark fund's return is nearly 11 percentage points lower than what you would have earned by just buying and holding the iShares bitcoin fund around the clock. Of course, that's way too short a period to judge the strategy -- but so is data that begins only in January 2024.
Among this year's new ETFs, one seeks to double the daily gains or losses of palladium, one combines options trading and space-related stocks, and another seeks to generate 15% annual income by layering option contracts on the top-20 most recently disclosed stock picks of investor David Tepper's hedge fund. They all charge 0.95% or more annually, or at least $95 on a $10,000 investment.
All this is a far cry from ETFs that buy and hold hundreds of stocks or bonds for fees as low as $2 or $3 a year on a $10,000 investment.
This generation of ETFs isn't just more expensive and risky than its forebears. It's also much less tax-efficient.
You could hold an old-fashioned, broad-based stock-index ETF for years and never incur any capital-gains tax. On the other hand, some ETFs that use options to juice income, or that seek to double the daily returns of stocks and other assets, can smack investors with big tax bills.
All this means you can no longer take a fund's quality for granted simply because it's an ETF.
"As product proliferation occurs in the edgier parts of the market," says Dave Mazza, chief executive of ETF manager Roundhill Investments, "it's incumbent on investors to do more homework."
Last year, almost a third of all new money flowing into ETFs went into nonindex funds, says Elisabeth Kashner, director of ETF research and analytics at FactSet. Yet, she says, "this is a 'yes and' market." Yes, active ETFs with high expenses and flashy strategies are attracting much of the attention -- and traditional, low-cost, well-diversified ETFs continue to form the core of most investors' portfolios.
Snacking on junk food is occasionally acceptable. Frequent indulgence is potentially addictive -- and hazardous to your wealth.
Write to Jason Zweig at intelligentinvestor@wsj.com
(END) Dow Jones Newswires
May 22, 2026 05:30 ET (09:30 GMT)
Copyright (c) 2026 Dow Jones & Company, Inc.
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