Key Questions: Are More ETFs Really Better for Investors?

The exchange-traded fund (ETF) landscape has expanded at an extraordinary pace over the past several years, and 2026 is proving no exception. Product launches have accelerated steadily (from roughly 400 in 2022 to more than 1,000 in 2025), and the current year is on track to match or exceed that record, with close to 600 new ETFs already launched by midyear. Over the past 25 years, the number of U.S. ETFs has grown from a relatively small base to more than 4,000 and counting, while the number of publicly listed U.S. companies has steadily declined over that same period. In 2025, the number of U.S. ETFs surpassed the number of publicly listed U.S. companies, and the gap has continued to widen in 2026.

While early ETFs centered on broad, low-cost passive exposures, the industry has increasingly shifted toward active strategies – and not just traditional bottom-up stock picking. Today’s growth is being driven by highly specialized, often hyper-concentrated funds targeting narrow slices of the market, niche themes, and even single securities. In many cases, the underlying exposures have become more complex, more expensive, inherently more volatile, less intuitive, less diversified, and arguably more speculative. 

For readers interested in the evolution of active ETFs and how we arrived at this point, I encourage you to revisit the earlier article Key Questions: Active ETFs or Mutual Funds: Which Belongs in Your Portfolio? | Key Wealth.

Active ETFs Require Greater Scrutiny

Investors have been inundated with ETF narratives explaining why the structure is compelling, including its tax efficiency, transparency, real-time pricing, and lower costs relative to mutual funds. Asset managers have capitalized on this momentum, launching increasingly creative products that expand access for investors who might not otherwise participate. Many of these niche strategies (such as leveraged ETFs, digital asset exposures, trend-following approaches, and thematic offerings) are better suited as satellite allocations rather than core components of a well-diversified portfolio, and some are better suited to speculation and short-term trading versus long-term investments. Despite their limited role and often higher fee structures, firms continue to introduce these specialized products at a rapid pace.

Many of these newer ETFs can appear appealing, often tying directly to current headlines and popular market narratives. While some are clearly well-founded, others require a more measured and disciplined evaluation. 

In general, asset managers tend to name and position products in a way that reflects their intended return profile. However, going beyond the surface and examining the underlying holdings of active ETFs can often be revealing. While some products are transparent and easy to understand, others involve more complexity and warrant deeper research and analysis before investing.

One example of newer ETF structures that may only be appropriate for certain investors is the buffered ETF category. These products are designed to deliver a defined outcome: capturing market gains up to a specified “cap” while offering downside protection through a predetermined “buffer.” The concept can be attractive (particularly for investors seeking more predictable return ranges), but it is critical to understand how returns behave and potential holding period constraints. Additionally, there are many variations of these products, as asset managers continue to introduce different structures and features. Gaining a clear understanding of how each ETF functions, including its underlying mechanics, is essential to avoid unexpected outcomes in different market environments.

Another example that may not be appropriate for many investors is leveraged ETFs. These funds seek to deliver 2x, 3x, or even 4x the daily return of an underlying index, sector, industry, or individual security. For a large wealth platform like Key, most of these products are unlikely to be suitable for a long-term-oriented platform, as they are often highly volatile and are generally designed for short-term trading rather than long-term investment. 

So, what may look simple on the surface can carry meaningful complexity beneath the ETF wrapper.

Passive ETFs May Not Provide the Exposure They Appear To

Another notable dynamic is that even passive ETFs may not always provide the exposure investors expect at first glance. While these funds track predefined indexes, the quality, composition, and diversification of those indexes matter. Several major benchmarks have become increasingly concentrated, reducing the diversification benefit investors may assume they are receiving. The S&P 500, for example, includes hundreds of companies but has recently been heavily influenced by a relatively small group of mega-cap technology and AI-related names. A similar issue exists in emerging markets, where broad benchmarks can carry meaningful exposure to a narrow group of technology and semiconductor-related companies. As a result, investors using passive ETFs for broad U.S. or emerging market exposure may be taking on more concentrated, technology-oriented exposure than they realize. In our view, this does not weaken the case for passive or emerging market investing, but it does reinforce the need for thoughtful implementation and careful due diligence on what an ETF actually owns.

Conclusion

Ultimately, the continued expansion of the ETF marketplace presents both benefits and challenges for investors. More choice can create better tools, broader access, and more precise portfolio construction, but it also places a greater burden on investors to understand what they actually own. As the wrapper becomes increasingly flexible, the focus should remain less on the ETF label itself and more on the underlying exposure, structure, cost, and role within a portfolio. In a market where new products are arriving at a rapid pace, disciplined due diligence matters more than ever.

If you have specific questions regarding ETFs in your portfolio, or ETFs you may be considering, please contact your Advisor.