With the U.S. ETF market headed for a record-setting year of new product launches, fears are growing that the industry is sliding toward speculative excess. Morningstar analyst Daniel Sotiroff thinks leveraged ETFs are right in the middle of it.
In the first nine months of 2025 alone, nearly 800 new ETFs have hit the market, surpassing 2024's full-year record of 746. The total could top 1,000 before year-end, according to Reuters data, a staggering pace that has prompted even insiders to warn of "an unsustainable level of launches."
Sotiroff agrees, but with sharper words.
"Most of the ETFs launched this year don't really serve a legitimate long-term purpose," he told Benzinga. "I suspect they'll eventually shut down, though it may take longer than three years for some of them."
The Speculative Surge
While industry leaders cite growing investor choice and innovation, Sotiroff sees something more troubling behind the wave of leveraged and single-stock ETF filings.
"I don't think it's genuine investor demand or a supply gap," he said. "A lot of these launches are aimed at creating speculative ETFs that attract naïve users. The creators and users are gambling and expecting a huge payoff. What they're doing is the exact opposite of investing."
Leveraged ETFs — products designed to multiply daily returns, often by two or three times — have become increasingly aggressive. The recent filing by VolatilityShares to launch 5x leveraged ETFs tracking Bitcoin, Ethereum, Tesla Inc (NASDAQ:TSLA), Strategy Inc (NASDAQ:MSTR), and Solana shocked even veteran analysts.
"That filing was mind-blowing," Sotiroff said. "About half of the leveraged ETFs launched more than three years ago have shut down, and another 17% of them have lost 98% of their value. The 5x leveraged ETFs are just amplifying those risks."
A Market Of Extremes
At the end of September, around 1,600 ETFs held less than $50 million in assets, a red flag for survival.
"ETFs with very little AUM are the most vulnerable to shutting down," Sotiroff noted. "I suspect most of those aren't going to live very long."
While speculative enthusiasm remains, the segment's scale is limited relative to the broader $13 trillion U.S. ETF market.
"Leveraged and derivative-based ETFs are attracting some money," Sotiroff said, "but they account for a relatively small segment of the net inflows across all ETFs."
Still, the combination of easy regulatory pathways, copycat product design, and retail speculation is fueling a market dynamic that Sotiroff believes will end badly for many participants. "Leveraged ETFs perform poorly over long periods," he warned. "Eventually, the leverage works against them, and it becomes almost impossible for them to recover."
Retail At The Front Lines
Financial advisers, meanwhile, remain wary of small or risky funds, leaving retail investors disproportionately exposed.
"It's not new for advisors to avoid small ETFs," Sotiroff said. "Unfortunately, a lot of the leveraged ETFs have largely been aimed at retail investors who don't know what they're getting into."
As leveraged ETF filings continue to multiply, and issuers test the SEC's appetite for even higher leverage, Sotiroff's warning cuts through the noise: the ETF market may not be in a bubble yet, but parts of it are starting to look like a casino.
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