Don't be tempted by the hundreds of new ETFs that launch every year. Very few are deserving of a spot in your portfolio, says Morningstar.
Of the roughly 4,000 ETFs trading on U.S. exchanges, only about 11% have value and sustaining power, says a new report by Morningstar's Daniel Sotiroff. Just 738 ETFs have assets under management of $1 billion or more, making them adequately profitable to their issuers. And of those, only 461 are backed by parent firms with above-average or high Morningstar ratings.
The report is an indictment against the ETF industry's frenetic launches of fresh funds. Last year, 757 new ETFs opened while only 174 closed, says the Investment Company Institute's Fact Book. And in 2023? More than 510 new ETFs launched.
"New ETFs with good long-term merit are increasingly rare. Exercise caution when looking at the latest choices," said the Morningstar report.
Avoid The Shuttered ETFs
Jumping on a small, gimmicky ETF might just leave you with a fund that closes. This year, Defiance shut down its ETF that invests in hotels, airlines and cruise lines, says ETF.com.
Some ETFs just can't compete with rivals with more assets in similar funds. American Century this year closed its low-volatility ETF, says ETF.com, even as some other low-volatility funds thrived during the Trump tariff turmoil. The iShares MSCI USA Min Vol Factor ETF is up 5.5% this year — topping the S&P 500. And that ETF is not going to disappear suddenly, as it holds $24.1 billion in assets.
"Size also confers some advantages. Large ETFs are more likely to be profitable for the provider, so they're far less likely to shut down," Morningstar said. "And most gained their prominence over time. They tend to have longer track records, which can provide some valuable insight about how they perform in different environments."
Not All New ETFs Are Toxic
But don't let some questionable funds prompt you to always rule out new ETFs, says Todd Rosenbluth, head of research at Vetta Fi. Some new ETFs might solve an issue in your portfolio.
"I do not believe new ETFs are gimmicks, but investors need to determine which, if any, are adding value to their portfolios," Rosenbluth said. "Some recently launched ETFs provide downside protection to an investment style, while others offer the potential benefits of active management through ETFs."
Rosenbluth points to two ETFs as examples: Calamos Bitcoin 80 Series Structured Alt Protection and the Cohen & Steers Real Estate Active ETF.
"Investors that have held out investing in bitcoin because of its elevated volatility might find CBTA or funds like it appealing," he said. "Meanwhile, those investors that have turned to active mutual funds to gain real estate exposure might be excited that the experts at Cohen & Steers offer an ETF alternative."
But it's important to consider how a new ETF interacts with your portfolio, he says. If you already own an S&P 500 index fund, you have a 2% exposure to real estate and may not want to add more.
New ETFs, though, could help too. Worried that Microsoft and Nvidia each account for 6% of your S&P 500 index fund? The new iShares S&P 500 3% Capped helps you trim the risk of overexposure to a single company.
"The market will determine what is and is not a successful ETF," Rosenbluth said.
New ETFs Are Booming
| Year | New ETFs |
|---|---|
| 2024 | 757 |
| 2023 | 518 |
| 2022 | 414 |
| 2021 | 458 |
| 2020 | 325 |
| 2019 | 235 |
| 2018 | 246 |
| 2017 | 259 |
| 2016 | 232 |
| 2015 | 276 |
