ETFs were once almost synonymous with low-cost, sensible investing. But that era is changing fast. In this episode, Ben Felix, Dan Bortolotti, and Ben Wilson introduce and unpack the concept of “ETF slop”—the explosion of complex, high-fee, behaviorally engineered ETFs that are designed to attract assets rather than improve investor outcomes. The trio traces how ETFs evolved from simple index-building tools into wrappers for increasingly speculative strategies. They discuss how the ETF “halo effect” can mislead investors into equating structure with quality, and why innovation in financial products often benefits manufacturers more than end investors. From thematic hype to downside “protection” that isn’t what it seems, the episode offers a clear framework for thinking critically about modern ETF offerings.
Key Points From This Episode:
(0:00:04) Introduction to the Rational Reminder Podcast and the hosts.
(0:00:39) Ben introduces the idea of “ETF slop” and why ETFs are no longer synonymous with sensible investing.
(2:20) More actively managed ETFs now exist than index-tracking ETFs in the U.S.
(3:30) ETFs increasingly engineered to attract assets rather than improve investor outcomes.
(4:04) Record ETF launches in 2025: over 1,000 in the U.S. and 300+ in Canada.
(6:43) Average management fees on newly launched ETFs rival traditional active mutual funds.
(7:47) The ETF “halo effect” and why structure is mistaken for quality.
(10:31) What an ETF actually is—and why it’s just a wrapper for a strategy.
(11:13) The first ETF was launched in Canada and still exists today.
(14:40) ETFs as tools for speculation versus long-term investing.
(17:08) Evidence that simpler allocation funds reduce harmful investor behavior.
(20:35) Why too much product choice can make good investing harder.
(21:40) Four categories of ETF slop introduced: thematic, buffer, covered call, and single-stock ETFs.
(22:16) Why thematic ETFs appeal to optimism and extrapolation bias.
(24:04) Evidence that most thematic ETFs underperform after launch.
(26:25) Morningstar data: almost no thematic ETFs outperform over long horizons.
(28:55) Why exciting narratives don’t translate into superior returns.
(31:25) Buffer ETFs explained: capped upside with partial downside protection.
(34:31) Research showing high fees, high costs, and inconsistent protection.
(38:16) Why simple stock/bond mixes dominate buffer ETFs even in drawdowns.
(42:53) Covered calls: high income today, lower total returns tomorrow.
(45:48) Why covered call ETFs systematically underperform their underlying assets.
(47:38) Income needs can be met more efficiently without covered calls.
(48:19) The cult-like following driven by double-digit yield marketing.
(49:57) Single-stock ETFs as the “sloppiest” form of ETF slop.
(53:44) Leveraged and inverse ETFs magnify volatility and complexity.
(56:20) Research showing massive underperformance versus simple benchmarks.
(58:56) Why these products resemble speculation more than investing.
(1:03:35) Complexity in investment products is strongly linked to poor outcomes.
(1:05:48) John Bogle’s warning: beware of new and “hot” investment products.
(1:06:48) Why ETFs are powerful tools—but only when used correctly.
Read The Transcript:
Ben Felix: This is the Rational Reminder Podcast, a weekly reality check on sensible investing and financial decision-making from three Canadians. We're hosted by me, Benjamin Felix, Chief Investment Officer, Dan Bortolotti, Portfolio Manager, and Ben Wilson, Head of M&A and Portfolio Manager at PWL Capital.
Dan Bortolotti: Happy New Year, everyone.
Ben Felix: Yes. Happy New Year.
Ben Wilson: Yeah, good to be back. It's episode 392.
Ben Felix: 392, coming up on 400 here. Can't say that I ever thought we would get there when we started the podcast, but here we are.
Dan Bortolotti: It's what, eight years?
Ben Felix: Around there, yeah. Been going for a while.
Dan Bortolotti: A long journey.
Ben Felix: Every week. We have a topic today that I've been thinking about for a while. I realized that it needed a name.
I don't know if I'm the first person to call it this. I'm sure other people have written about it or something, but what I'm calling it is the rise of ETF slop. We're going to talk about that.
I think it's actually a real problem for investors. Let's get into it. ETFs are no longer synonymous with sensible investing.
Dan, when you started your blog, ETFs were a big part of it. It's why anybody could go and build an index fund portfolio. Back then, most, but not all, ETFs were low cost index funds.
You could stick your hand into a bag of random ETFs and you're going to pull out probably something pretty good. But, more recently, the fund management industry is launching literally hundreds of new actively managed ETFs every year. And, in the US, this is an interesting little statistic.
For the first time in US market history, there are more ETFs than there are individual stocks. We've known for a while there were more indexes than individual stocks, which is always an interesting data point to pull out. There are now more ETFs than there are individual stocks in the US stock market, which I think is pretty crazy.
Dan Bortolotti: I think that's been the case for a little while in Canada, but of course we have so many fewer publicly traded companies. To think of ETFs having eclipsed the number of individual stocks on the US exchanges is remarkable.
Ben Felix: The other data point that's interesting is, again, speaking to the US market, there are now more actively managed ETFs than there are index tracking ETFs. Again, ETFs used to be synonymous almost with index funds. I think that's a mistake that a lot of people still make, where people refer to ETFs as if that meant the same thing as index funds.
Even if that were true on average, because there were more index ETFs than active ETFs, it is no longer the case. There are more actively managed ETFs than index tracking in the US. I think the big issue for investors is that a lot of the ETFs being launched today have really been engineered to attract assets, which of course fund companies are going to build products that they think are going to sell.
They've been engineered to sell products to attract assets rather than improve outcomes for investors. That's not a new thing. Financial product innovation is always targeted at selling product as opposed to improving outcomes, but I think that has now arrived in the ETF market in full force. That's what I'm calling ETF slop.
Ben Wilson: It's a crazy phenomenon. The more we talk to people in the industry, different advisors, and even just people that have had experience in different parts of the industry, you hear more and more stories of banks or large institutions creating a product to meet a marketing need. People are talking about this.
Let's design a product that we can sell to them to fulfill that need rather than building a good product that isn't the best interest of clients. It's really just we need to sell. There's an opportunity. Let's sell it.
Ben Felix: Totally. Active versus index aside, 2025 was a huge year for ETFs. Again, looking at the US market, there were more than a thousand new ETFs launched in calendar year 2025 alone.
I think it's almost 1,100 when I looked at the data. That's wild. That's a record.
That's the most new ETFs launched in a year in the US. In Canada, we had more than 300 new ETFs launch. Smaller market, fewer assets to go around.
I guess it makes sense that we would have fewer fund launches, but even still, 300 new ETFs in a year is wild. Again, in Canada, as with the US, the majority of those new fund launches were actively managed. Dimensional funds are actively managed.
Active management is not inherently a bad thing, but a lot of these funds that are launching are using complex strategies that I think are unlikely to be beneficial for most investors. We can't just say active is bad, but I think that a lot of the active ETFs that are being launched are probably not great. Low fees have been one of the hallmarks of ETFs.
That's one of the reasons they became popular. I think they've had a huge impact on drafting fees down in the investment management industry, generally, as they become more and more popular. A lot of index ETFs have fees, 0.1%, in many cases even lower than that. But I looked at the average management fee for US listed ETFs that were launched in 2025. On average, it was 0.7%, which is on par with typical actively managed funds. 166 of the newly launched funds in the US had a management fee above 1%.
That's not even the expense ratio. That's just the management fee. There are other costs that go into managing a fund.
Investors are paying more than the management fee to own the product. It's crazy when you look at the data, what type of products are being created. Index ETFs showed investors the light, that you don't need to pay high fees for actively managed mutual funds, which is really what ETFs were displacing.
You don't need to pay high fees for actively managed mutual funds that trail the market. That did cause real change in Canada and the US. You see it in the data.
There's been a massive shift from actively managed mutual funds to index ETFs and to a lesser extent, index mutual funds. But now we're seeing this new wave of high fee ETFs and it's bringing us right back into the darkness. I don't know how to articulate it, but I think the ETF wrapper has a bit of a halo effect around it, where as I mentioned earlier, people hear ETF and they think, oh, that's good. ETFs are good.
Ben Wilson: Compared directly to mutual funds. Mutual funds have this stigma that mutual funds are bad, ETFs are good.
Ben Felix: Correct. I think that's contributing to people looking at these new ETFs that are being launched that are actively managed in a high fee and look a lot like all the bad things that index ETFs were saving us from, but they're getting a bit of a pass because someone who would hold their nose at an actively managed mutual fund would be willing to buy one of these ETFs. I don't know exactly how to articulate that or how to describe it.
I think that's part of what is happening here where, like you said, Ben, actively managed mutual funds have this reputation now where a lot of people won't touch them, but that doesn't seem to apply to a lot of these new actively managed ETFs that are being launched, even though they've got all the same issues.
Ben Wilson: To the mass client investor market, ETFs are still a relatively new tool. Companies and marketers are taking advantage of, this is new, this is better for you. Mutual funds are high fee, they're no good. Buy an ETF, you're going to be better off.
Dan Bortolotti: A good example of how much that impression is really the case with investors, like in other words, ETFs have a halo about them that mutual funds don't. There are a couple of fund companies that have created products where it's a mutual fund, but it's only holding as an ETF. They've named the fund such and such ETF fund.
You can tell the reason that they did it was simply so they could use the word ETF in the title of the fund and deceive investors. That's the only reason to do something like that. I think it's going to take some time for people to get away from this idea that the key factor when evaluating an investment product is the structure, ETF versus mutual fund.
I've spent so much time trying to talk to investors about this and said, listen, it's about cost and it's about strategy. It's not about structure. I would much rather buy a mutual fund with a low fee and a passive strategy than an ETF with a high fee and an active one.
That's obvious to everyone in the industry, but that is still a pretty nuanced argument to get across to investors. Hopefully, that will change. I think, as you said, it's going to take some time for that to trickle down, but it's definitely still the impression, I think, of most investors on the street.
Ben Felix: It is a complicated topic where we've talked about this on this podcast last year. In the US, there are some tax arguments for using the ETF structure. In Canada, it's flipped where there are actually some tax arguments for using the mutual fund structure.
Like you said, Dan, that's a pretty esoteric topic for most people to understand.
Dan Bortolotti: Certainly, tax reporting is easier with mutual funds than it is with ETFs. If you're a DIY investor, for example, something we deal with all the time with our clients, it's definitely additional work for us to make the adjustments and the reporting at tax time. Mutual funds tend to be a lot easier in that situation, but that's probably not what's driving it with individuals because they may not even understand that.
It is a good example of why, and I've argued this before, in many ways, the mutual fund structure is superior. Not in all ways, but in some ways, it is. It's certainly more user-friendly, easier to set up monthly contributions, et cetera, et cetera.
There's a lot of good reasons to argue for the structure, but a lot of that has been lost in this mutual funds are 2.5% for active management that underperforms the benchmark. It's like, not all of them. We really have to get that message across, I think.
Ben Felix: Definitely. Let's just back up for a second. What is an ETF?
ETF stands for exchange traded fund. That's a fund that trades on a stock exchange like a stock, unlike a mutual fund, which does not trade on a stock and you purchase and redeem units from the fund company. You've alluded to that just now, Dan, but they're very different mechanisms for how they're bought and sold, but they're both funds that let you invest in a diversified pool of assets.
The first ETF was actually created in Canada, kind of a neat little fact. It was an index ETF tracking Canadian large cap stocks, and that fund still exists in a slightly different form today. Kind of neat that the first ETF was Canadian and still trades today.
Dan Bortolotti: That's super cool.
Ben Felix: Yeah, it is cool. An ETF is, and a mutual fund in both cases, but we're talking about ETFs here.
An ETF is just a wrapper that can hold an investment strategy inside of it, which makes it easy to get exposure to that strategy by investing in units of one single fund. It's obviously a lot easier to buy an S&P 500 ETF than it is to buy all of the stocks in the index and then make all of the necessary trades to match the index composition over time. It's even more involved when you start thinking about how the composition of the market changes over time, let alone the constituents of the index.
Nobody wants to do that. We buy index funds, which are super, super easy. It's like going to the store and buying a pre-made fruit salad instead of shopping for and washing and chopping and individually treating in their own special ways all of the different pieces of fruit that you need to make a salad.
That use case doesn't just apply to index strategies. That was the first way they were used and early on how they were most frequently used. But even a complex strategy that uses leverage and derivatives or a combination of those two things or other financial instruments that make up pretty complex investment strategies, that can also be packaged up as an ETF.
Now, if you're the end investor, you can go in instead of knowing how to trade options and use other derivatives and access leverage and all that kind of stuff, instead of knowing how to do that yourself, you can just say, I want this investment strategy and you can buy an ETF that is doing the implementation for you. As an aside, super cool. The fact that we can do that is really interesting.
Whether it's a good thing for investors is a whole other question, but from a technology perspective, that's pretty cool that we can do things like that. Index ETFs, they were massively successful. Bogle first launched index mutual funds, John Bogle and Vanguard.
People were very skeptical that that would be successful. Bogle actually, interestingly, was very skeptical of the ETF structure. He wasn't a fan.
He thought it made it too easy for people to trade them actively. I think he did soften on index ETFs later on, but he continued to be a critic of the ETF structure, actually, for a lot of reasons that we're going to talk about. He predicted what we're seeing now.
I've got a quote from him later on. Index ETFs, we'll show a chart in the video, they swallow a huge portion of the investment assets that are out there. You see the flows out of actively managed funds and into index ETFs.
That's been a good thing for investors. Fees have gone down. Investors are keeping more of the market's returns.
I think that's great for investors, but low fees on those funds and the fact that the market is dominated by Vanguard and BlackRock and maybe a couple of others mean that if you're in the financial industry and you want to get into the ETF business, you're not going to launch another S&P 500 fund. It just doesn't make sense. That brings us to the rise of ETF slop.
Ben Wilson: Even before getting to the rise of ETF slop, as you said, John Bogle predicted that or suggested that they could be used as a tool for active investing. We see that all the time. Even if you're using index ETFs, using it as a tool to then predict, okay, this part of the market is going to do well.
I'll buy that, but then I'll sell. It's very accessible, but it's also easy to trade and exchange for something that you think is going to do better, which isn't the intent of index ETFs.
Ben Felix: It's not the intent. I think while that is true and while Bogle's concerns were valid, that index ETFs can be used for speculation if someone so chooses. I mean, it's kind of a feature, honestly.
If someone wants to speculate on the movement of a market, the fact they can use ETFs is cool from a financial technology perspective.
Ben Wilson: It's super accessible too. Anybody can do it regardless of your wealth, regardless of where you are in the world.
Ben Felix: We're not promoting that to be clear, but it's cool. I think the difference between that and ETF slop is that ETF slop is designed for speculation. Index ETFs are designed or at least very well suited for long-term investors.
The ETF slop that we're going to talk about is pretty much exclusively designed for various types of speculation. In one case, yes, you can use index funds, index ETFs as tools of speculation, but they're not designed to do that. You can use them for good low-cost long-term investing.
ETF slop is designed for speculation and I don't think you can use it for good low-cost long-term investing.
Dan Bortolotti: On some cases, some of these ETFs just don't behave well if you hold them for the long term. The leveraged ones are the obvious example. Those are specifically not designed as long-term holdings.
You know what I think would be interesting and there's not enough data yet, but I remember Vanguard did some research some time ago that showed during the 08, 09 financial crisis in particular, people who held balanced mutual funds showed a lot more tendency to buy and hold than people who held other types of investments. Their argument was a lot of people criticized balanced mutual funds as being cookie cutter solutions, but what they do is impose a certain framework for discipline. I wonder if the same might be true.
It's certainly true that a lot of people trade ETFs too much, but my guess is if you were to look at the asset allocation ETFs that have been out now for a number of years, like a VBAL type or VGRO investment that holds stocks and bonds, my guess is those don't have a ton of trading volume. I don't think, and again, this is based purely on speculation, but I'm thinking that most people aren't buying and selling VBAL and VGRO. They're more inclined to treat those investments like a balanced mutual fund.
There's no data to back that up that I'm aware of. I would be pretty surprised if that was not the case.
Ben Felix: There is some, not for Canada specifically, but there's data from in the Morningstar Mind the Gap report. They do show that allocation funds continue to have the lowest gap between investor and fund returns. That speaks to your point then.
Then I've also seen data from 401k plan providers where there's much less trading activity around market volatility from people invested in target date funds as opposed to self-designed allocations or other investments. That does continue to be the case. ETFs exist.
They're really popular. They've got this halo effect. Used to be mostly low-cost index funds or largely low-cost index funds.
In more recent history, in both Canada and the US, and probably other markets too, I know those two better, a combination of regulatory changes, regulatory approvals, like regulators giving the nod to various products or allowing certain products to start trading, which signals to other ETF providers that, hey, okay, we can do this. And product successes. Someone launches a single stock ETF and it gathers a bunch of assets.
Other people are like, oh, well, we better get into this business too. All that stuff happening around the same time. In the US, they had the ETF rule, which is a big deal for this.
That all led to this rapid proliferation of ETFs for a bunch of different investment strategies that are really, like I mentioned in the introduction, designed to appeal to investors who want to do more than an index fund, but maybe don't want to invest in traditional actively managed funds. More product choice. Maybe that sounds like a good thing.
Investors are free to choose from all of these different interesting investment strategies, but this type of innovation in financial markets and in financial services has a pretty long history of driving profits for the firm creating the product, often at the expense of the end investor. I don't know how excited we should be about product innovation in financial services. Index funds being a rare exception where I think that has been good, although some people would argue that it has affected asset prices in such a way.
It's actually making investors worse off. We just don't realize it yet, but that argument aside, it's definitely driven down fees and made markets more accessible. The innovation we're seeing now is what I'm calling slop.
Slop, I think it was the word of the year in 2025. Its current meaning is digital content of low quality that's produced in large quantities, usually by artificial intelligence, by AI. I think we're seeing something very similar with ETFs.
I should mention digital content slop. It makes it harder to find information. It makes it harder to find the truth.
I think we're seeing something similar with ETFs where there's huge numbers of complex high fee products that are likely to make investors worse off rather than better, in my opinion, are making it harder for investors to find good information, to choose sensible low cost investments suited to their long term goals. It's like walking into a library or a bookstore. The bookstore, you know there's a bunch of good books in there, but someone just came in and dumped like 10,000, I don't know, trashy romance novels on top of all the classics.
Now you've got to dig through all this slop to find the good stuff. There's still lots of good investment products out there. There's lots of good low-cost funds out there, but there's also a lot of slop.
If you're an investor with limited knowledge or who's new to the market and you're looking through what's available, it's getting harder and harder to know where to look and to sift through the slop.
Dan Bortolotti: That's true, even if you look on the websites of the major fund providers who have outstanding index funds. You go on the Vanguard website, the BlackRock website, there's a number of great ETFs that are perfectly good building blocks of a diversified portfolio. In and among 9, 10 times the other number of ETFs that probably aren't.
Those ones are unlikely to have too many terrible products, but there's still a lot of narrow, marginal exotica that you probably don't need in your portfolio. As you said, if you don't really know what you're looking for, you're lost. You're going to need some kind of direction to figure out what the right building blocks are.
Ben Wilson: They're also designed to play into the behavioral biases of investors. They make it compelling. They are great at marketing.
They design products that people think that they should want. It's hard to sift through the slop that's out there because it's like, no, this sounds great and I'm hearing these things in the marketplace and I want that.
Ben Felix: That's what I was going to comment on, Ben. I totally agree. They name these products in a way that they know that investors will see the name or hear the description of, oh, I want that.
We'll get to one later where they describe the product as being like shock absorbers for your portfolio. Who does not want that? We're going to talk about four product categories that fit into my definition of ETF slop.
We'll explain why most investors should probably avoid them. The four categories are thematic ETFs, buffer ETFs, covered call ETFs and single stock ETFs. Each one has its own distinct drawbacks and it appeals to different investor biases.
We mentioned earlier, there were a huge amount of ETFs launched in the US market in 2025. A huge portion of those were leveraged ETFs. You mentioned those earlier, Dan.
There are a lot of derivative income ETFs, a lot of defined outcome. Those are the buffer ETFs. 27% of the new ETFs launched in the US market last year were single stock ETFs.
Derivative income ETFs took in most of the flows. There's a difference between obviously the number of ETFs that were launched. A lot of those were leveraged ETFs, but a lot of the flows went into basically covered call ETFs.
We're going to start with thematic ETFs. I've had some new data on these, which was pretty crazy. We've talked about thematic ETFs in the podcast before.
These are funds that focus on specific trends in the economy. A big theme in 2025 was AI for obvious reasons. Past examples of investment themes would be things like metaverse, crypto, clean energy, electric vehicles, and cannabis.
I think thematic ETFs do a really good job capturing the imaginations of investors. You just imagine how rich you're going to be if you invest in the next big thing before everyone else realizes how big it's going to be. The problem with these types of products is that they tend to launch after the theme they represent has delivered high returns.
When investor interest is high, because everyone's like, oh, wow, this part of the economy or this sector of the stock market is doing really well. That's exciting. Then the fund company launches a product based around that theme.
Then typically what happens, the theme goes on to deliver poor performance after the peak of excitement when the fund launches and everyone puts their money into the product. There was some research done by Morningstar commissioned by the Financial Times. The Financial Times wrote an article about this that shows that the vast majority of thematic ETFs, which the article notes enjoyed a surge in popularity in 2025, the vast majority have underperformed broad market benchmarks.
That's the FT's Morningstar study. A 2021 study, this is the Zahi Ben David paper. We had him on the podcast and have talked about the paper in a past episode.
They find that specialized ETFs, what they're calling thematic ETFs, underperform by 6% on average in the five years after launching, even though their themes had strong performance before the launch, so kind of what I was talking about. They all do really, really well before the fund launches, then post launch, they tend to perform quite poorly. The explanation they give is that before the ETF launches, the stocks and the theme have usually been rising in price, in relative valuation, relative price.
The price has gone up, the relative price has gone up and they've also been getting a lot of positive media attention. Then the ETF launches and by that time, stock prices have kind of started to come back down to normal levels, media attention has declined and investors who piled all their money in right after launch end up not doing so well.
Ben Wilson: The only winner is the product manufacturer that has preyed on the emotions of investors.
Ben Felix: Correct. They charge a premium, they charge much higher fees than an index fund for these specialized ETFs. In that paper, they kind of argue that these ETFs launch based on themes where investors are really optimistic or really interested or excited for the reason that they know dollars are going to pour in and they're going to be able to charge high fees in those dollars.
Investors are willing to put their money in because they're super excited about whatever the theme is. Then typically, reality does not match the high expectations that investors have for the theme and they go on to perform poorly, in some cases, spectacularly. Morningstar, I don't know how long they've been doing this, but I found their 2025 thematic fund landscape, which is a really nice report they have posted online.
In that report, they find that the long-term odds of picking a thematic fund that both survives and outperforms global equities is very low. We'll put a chart up from Morningstar's report that shows that just over 10% of thematic funds globally outperform the broad index at the 10-year horizon. Looking at Canada specifically, 100% of Canadian listed thematic funds either close or underperform at the 10-year horizon and 100% of funds close by the 15-year mark. To me, that statistic is wild.
Ben Wilson: That's really unbelievable.
Ben Felix: Nuts. We'll put a chart for that in so people can see the data, but it's wild. The underlying reasons, I've done a couple of videos, we've done a couple of podcast episodes, like really digging into the mechanics of why this tends to happen, of why themes, particularly around exciting or revolutionary or potentially revolutionary technologies, why they tend to follow this pattern. We can link out to those.
The short version is basically that all the exciting growth you expect from a theme is usually reflected in high stock prices for that theme. Then as reality unfolds, expectations tend to settle down and stock prices tend to follow to drop a little bit or a lot of bit. Cannabis was an extreme example.
That was a crazy one that we watched here in Canada. Canada legalized cannabis. Global investors saw the potential for this massive market to open up in Canada and in other countries that were potentially going to legalize.
Investors just piled dollars into cannabis stocks in Canada, but also thematic funds in Canada built around cannabis stocks. At the peak of the cannabis frenzy, cannabis funds made up more than 60% of the Canadian thematic market by assets, I believe. Today, they make up 1.4%. Pretty crazy. The hot themes today based on fund flows in Morningstar's report are security and AI, unsurprisingly. Cannabis is like an extreme bad outcome. I'm not saying we should expect security and AI to follow that extreme of a pattern.
Those are just bigger things that are much more consequential to the broader economy than cannabis. But, I do think it's important for investors to step back and consider the long term data on thematic investing. That has been out there, that paper from Zahi Ben-David's published in 2021.
We kind of know this, but investors continue to be attracted to these products probably because of attentional bias. Investors are basically attracted to shiny objects and fund managers know which objects are shiny or at least the good ones do, the good ones from a marketing perspective. There's also optimism bias.
Investors overestimate the probability of a good outcome. Extrapolation bias. Investors assume that recent trends like, oh, these stocks have done well recently, are going to continue indefinitely, which doesn't tend to be what happens.
In general, thematic funds belong in the pile of ETF slop, which should be avoided by most investors most of the time.
Ben Wilson: I think out of the four categories you've identified, this particular category can even be tempting for disciplined index investors. We've seen that with investors regularly, like, well, I'll invest 90% of my portfolio in a broad market index portfolio, but maybe I'll kind of YOLO and invest a portion in this because it's exciting. As you've said, it preys on the attentional bias of investors.
If you're doing it responsibly with a small portion of your net worth, it's probably not the end of the world. You can see how it's tempting for investors, even if it's something that rationally or intuitively, is probably not the best choice.
Dan Bortolotti: Especially now, if you want to talk about AI, just look at the broad market, especially in the US, and how much of just a plain vanilla index fund is dominated by companies in that industry. You want to get even more concentrated than that, that requires a bit of naivete, I think. I think this is where the thematic ETFs have the appeal, is that there's a narrative there.
This is a business that is going to be hugely influential, all of which is true, no doubt, but all of which is already reflected in the prices of those stocks. Somebody needs to come up with a trend ETF that tracks stocks that everybody else hates, not stocks that everyone already loves. That's extreme value investing, I suppose.
Even that, of course, is wrought with difficulty because as we always remind people, if people are sour on a lot of stocks, that might be for very good reason. It might not just be that they're underappreciated. It always comes back to the same thing.
Stop thinking that your hunches and your compelling narratives are true insight into what will outperform in the future because in the vast majority of cases, you're just fooling yourself.
Ben Wilson: I think you make a good point, Dan. When people get attracted to these thematic ETFs, they're not necessarily looking at the composition in their broad market portfolio. I've had a couple clients recently express like, I want a higher allocation to tech.
Then we actually look at the underlying holdings of their diversified portfolio and they're like, oh, wow, I've already got between 10% and 15% in the large cap growth stocks that I want an overweight in. That's probably enough.
Ben Felix: I don't know if I agree, Ben. I know this is the one that comes up with clients a lot. I think all of these are equally tempting to investors.
I think in our client base specifically, the thematic one comes up quite a bit, but when I look at other places around the internet and the comments in my videos and the rest of my community and stuff like that, or just online more generally, all of these ideas are very, very appealing to investors. That's why I think they're so dangerous, potentially harmful and profitable. The companies that launch these products are brilliant because they've identified things that investors are really going to want because they appeal so strongly to the biases they have.
If thematic ETFs plan investors optimism and extrapolative beliefs, buffer ETFs play on their pessimism. Investors tend to overestimate the probability of negative events and loss aversion. Investors feel the pain of losses more acutely than they feel the joy of gains.
Buffer ETFs are funds that are marketed as providing exposure to the stock market with some level of downside protection to smooth out the ride. I'm only picking on BMO here because they had really, really nice marketing on these funds. They did a really, really good job showing graphically how these products work
Great job BMO for the communications and I apologize for picking on you. I bring that up because I mentioned BMO a lot when we were talking about covered calls because BMO has some of the oldest, longest running covered call funds in Canada. I don't think BMO loved being picked on.
They did a great job keeping these products alive for a long time and managing them well that I'm using them as an example. Here again, BMO has launched these buffer ETF products, which is fine. They're obviously allowed to innovate and they've done a great job illustrating and explaining how the products work, which is very cool to see.
Then I'm picking on them because they did all the right things. I just feel the need to apologize. If we take the BMO US equity buffer hedged to Canadian dollars ETF January, and that January is part of a fund name.
As an example, this is an ETF that's designed to offer the return of a US large cap equity index up to a cap of 8.1% for the period of January 20th, 2025 through January 5th, 2026. That's why the January is in the fund name. They've got these for like staggered for a bunch of different months while providing a buffer against the first 15% of a decrease in the market price of the index.
That structure with a capped upside and a partial cap on the downside. You're protected from the first 15% of a decrease, but not after that. That structure is one of the most common structures for buffer funds.
We'll put a chart up in the video that the BMO fund I mentioned compared to the BMO ETF of the underlying equities over its current target outcome period. It's very clearly done its job. If you can see the video of capping downside up to a 15% loss and capping upside at around 8%.
It's cool to see. I'm in awe of all these products. It's incredible that we can create these things.
If the end user of this product really wants that very specific payoff profile, it's very cool that you can go and buy that. I'm impressed, but I think the setup comes with some problems. There is a paper on this in the Journal of Portfolio Management from some of the folks at AQR, a 2025 paper titled Rebuffed, an Empirical Review of Buffer Funds.
The BMO fund I just used as an example would not be in the sample in this paper, because they looked at US funds. They highlight the potential problems as the options used to structure the payoff may be naturally too expensive. The transaction costs of trading options may be high.
The fees managers charge may be meaningfully higher than they would alternatively charge in a passive allocation to the underlying reference asset. They do show data in the paper that this buffer ETF or buffer fund category has become a huge category measured by assets in the category and number of funds that have launched in the category. They also show consistent with my ETF slop thesis that the fees in this category tend to be quite high.
Using that BMO fund as an example, the fund has an MER of 0.73% compared to 0.09% for the reference asset for just BMO's version of the US equity index fund that that fund is tracking or related to. In the Rebuffed paper, they show that the vast majority of the buffer funds in their sample, which includes all US listed defined outcome funds in the Morningstar database with at least 24 months of history at the time that they did the study, offer inconsistent downside protection with realized losses frequently exceeding what investors might expect based on option payoff diagrams like what we showed in the video for the BMO fund, especially outside of narrowly defined target outcome periods. Probably the most important finding in this paper is that simple low cost alternatives like mixing equities with cash generally outperform buffer funds on average and even in drawdowns. I think the findings in that paper really raise the question of whether buffer ETFs are truly designed to serve investors' goals or just to cater to their behavioral biases and sell relatively high fee products.
The authors conclude that their analysis adds to a growing body of evidence that much of the innovation in this space is superficial, engineered more for sales than for substance. I don't think they mentioned ETF slop in the paper, but that's basically what they were writing about there. I really do think that the buffer ETFs are an interesting piece of financial engineering.
I really am in awe at a lot of these products. It's very cool what we can do. They're absolutely brilliant from a marketing perspective.
A lot like structured products, which have been around for much longer, you can have market participation with capped downside. How cool is that? It does seem really cool.
These products cater to very strong investor biases that make that seem cool. Again, this is where I got the shock absorbers. They mentioned that these products are like shock absorbers for your portfolio.
Who doesn't want that? You don't want a bumpy ride. As cool as they are, I don't think that these things improve expected outcomes for investors.
When you take into account the relatively high fees, the implementation costs, they're unfortunately probably detrimental to long-term investors in most cases. Then the other thing I would think about with this, if someone came to me and said, I really want to invest in a buffer ETF or a buffer fund, and I can only sleep at night with my portfolio if I have this product, it's probably a sign that you need to review your asset allocation, which could alternatively be expressed with a simple combination of low cost index funds, or even better, a risk appropriate asset allocation index fund, rather than these complex high fee products.
Dan Bortolotti: That's just it though, isn't it? People, I think, who would be attracted to a product like this, they understand that their upside is capped. They're not foolish.
They don't think they're getting exposure to the market with no risk. They understand, I want protection from losses, and I'm willing to give up a bit of the upside. That's great.
We all want to do that, or most people who aren't 100% equities, that's exactly what you want to do. It's just that there are cheaper, more transparent, and more effective ways to do that. That is just add some fixed income component to your equities.
We can come up with expected returns and expected maximum losses in a balanced portfolio, and they're not going to be guaranteed. Long term, we have a pretty decent idea of the range of possible outcomes for various asset mixes. It just seems to me that even though it's not as sexy, that's the best way to cap your upside and also control your downside.
That's what any diversified balanced investor wants to do. You don't need financial innovation to do that. I agree with you.
The funds are fascinating, the way they work under the hood. I just don't think it really fills a true need other than perhaps satisfies some behavioral bias.
Ben Wilson: I don't think it's just investors that are subject to this risk or behavioral bias. More and more conversations I'm having with advisors in my role, advisors, there's so much ETF slop out there that they're tempted by the narratives that the wholesalers or their parent company is pitching to them. Well, this sounds good.
They do their own cursory level of diligence. Don't dive deep. Do a bit of research on their own and check these boxes.
I think this is good for my clients without actually looking deeper under the hood and understanding maybe this isn't the best option, doing some data analysis comparison. Not every advisor out there is going to the depths to understand one product from another.
Dan Bortolotti: It's a good point. It would be interesting to see what percentage of these ETFs that we're lumping together as slop are purchased by DIY investors versus recommended by advisors. I have no idea whether that data exists, but Ben, I think you raise a good point.
Advisors are not immune to the same behavioral biases as individual investors are. They can often use those narratives themselves and not because they're trying to be deceptive. They genuinely believe them, I think for the most part.
They're just probably deceiving themselves.
Ben Wilson: Absolutely. Definitely. I've seen some extreme cases of this in my compliance years of experience.
I don't think they were intentionally deceiving investors. I think they truly believe that what they were recommending was in the best interest of their clients. I've seen books that were 95% of their entire book was invested in bullion funds because the advisor truly thought, this is great for my clients.
I believe this is a safe asset. This is where we should have our money. That would have worked out pretty well in 2025.
Ben Felix: That would have worked out pretty well since then, Ben, since you were in that role. Those guys are probably killing it right now.
Ben Wilson: If they're still in business.
Ben Felix: I think most advisors are good people, even if they're misinformed. There's academic research on that too that shows that advisors making recommendations into products that we would call suboptimal are doing it because they believe that that is the right thing to do. That research evidences that by showing that those advisors continue to invest in the exact same products, both while they're working, which you could argue, well, they're just doing that to show their clients so they can sell product, show their clients they're doing the same thing.
Then after those advisors retire, they keep investing in the same high fee actively managed funds. Conflicts of interest are a problem in financial services, but they're not the only problem. I agree with both of you guys.
I would bet that a lot of these products are being used. I know covered calls, we did our episode and I did a few videos on that. I did hear from some pretty pissed off advisors who are using that strategy and didn't like what I had to say about it.
Dan Bortolotti: They were probably being honest.
Ben Felix: 100%.
Dan Bortolotti: They probably weren't talking their own book.
They were being honest and I respect that, but it's certainly better than the cynical view, which is deep down they all know that their advice is terrible, but they're recommending it because it's better for their bottom line. As you say, Ben, I think that is the case in a very, very small number of cases.
Ben Felix: Yeah, I think that's right. Under covered call ETFs, unlike a buffer fund, covered call funds and covered calls more generally, they cap upside returns without offering meaningful downside protection. These are both strategies that are going to use derivatives to give you some type of payoff.
Covered calls are doing a little bit differently and you're getting a different payoff stream. The way covered calls do it is by selling call options on stocks that are held by the fund or if it's not a fund, you sell a call option on the stock that you own. If the underlying stock performs well, the upside is capped and if it does poorly, there's limited downside protection because you do get the option premium, but downside is mostly unprotected.
If you get a huge drop, you're going to get a little tiny bit of protection from the option premium, but you're going to eat most of that downside. You get this really asymmetric expected return profile with covered calls. As many people listening will know, I did a series of three videos on covered calls last year.
I'm not going to reiterate all of that here, but the important points are that these funds, covered call funds are designed to attract investors with their ridiculously high distribution yields, which are often enormous and are a huge focus of the marketing and fund webpages and all that stuff for these products. The branding names also often include the word "yield" or "income." I think the big problem with these products and the reason that I felt the need to make videos about them is that I don't think investors understand that the high distribution yields on these products comes with a huge trade-off on the upside of returns.
You're giving up a lot of potential upside in exchange for this high cash distribution. And the overall effect is that the total returns of covered calls should be expected mechanically to trail behind the total returns of their underlying equities. They should be expected to do that and that is what they have done when you go and look at the data on these products.
In those videos I did last year, I compared covered call funds to their underlying equities and found that they underperform most of the time, including for investors who need income from the portfolio, which was a big pushback that I got when I initially started talking about them. I looked at a few covered call funds in one video and then a bunch of people came and said, well, you picked bad ones. You picked ones that, of course, they're going to underperform.
If you look at this one, you'd see that covered calls are amazing. I got like, I don't know, 20 comments like that or more or 20 fund tickers like that from probably hundreds of comments that people say, well, no, you should have looked at this ticker. It's like, okay.
I went and looked at all the tickers. I was curious. I ended up making another video to go through all of those tickers and show that the exact same thing that I talked about with covered calls in general applies to all of these tickers as well.
In some cases, I think what was going on there is that they were not super easy to benchmark. I think one of them had a whole bunch of US equity in the fund, but it was being benchmarked to the Canadian index. That's why it had done well over that period and you go and benchmark it properly.
It just looked a lot different.
Ben Wilson: I think that reinforces what we were just saying that advisors think they're doing the right thing. They look at some level of data. This looks great over these periods compared to this benchmark, but they're not going to the depth of research that you did, for example.
We always encourage advisors, if you feel strongly, show me the data. We're just looking at numbers. We're not trying to shut down a product because we don't like it.
We're just actually analyzing the numbers and this is what we're seeing in the data. If you see something differently, we're always open to different perspectives.
Ben Felix: The other thing I did in those videos was modeled an investor who needs income from their portfolio because that was another one of the big pushbacks that I got is that, well, these make sense if you need income. I said, okay, let's test that. I modeled it out and asked if covered calls provide an advantage over a combination of regular portfolio dividends and occasional sales from the portfolio to fund income.
I took the covered call Fund, took how much income you're getting from that and then I looked at the underlying equities from that fund and just said, okay, if we pulled the same amount of income out of the underlying, are you better or worse off than the covered call? In all cases, you're worse off rather than better with the covered call, even if you need that amount of income from the portfolio. The other thing I did is I showed that a simple combination of stocks and cash can closely match the returns of the covered call Fund without putting a hard cap on upside returns.
I really came away from that being like, okay, there's probably a case for these products somewhere other than just the psychological case. There's got to be. I hope.
I can't find it. That's not totally true. Maybe they give you access to something called the volatility risk premium.
That's theoretically one of the reasons that these products could make sense, but it sure isn't showing up in the data that I looked at.
Dan Bortolotti: And it sure isn't the reason that people give for buying them.
Ben Felix: That is the point right there. No one is buying their covered call Fund saying, I need access to the volatility risk premium. They're saying, I want a 12% yield.
That's a great point Dan.
Dan Bortolotti: I don't want to dig into capital, Ben. You're saying you're going to sell some of the equities from time to time? That's digging into capital.
Ben Felix: Can't touch the principle.
Dan Bortolotti: You have to keep the capital intact and live off the 12% income.
Ben Felix: Now, one of the things that I did learn from making those three videos on covered calls is that it's got more of a cult-like following than dividend investing. I think. I don't know.
Maybe it's a close one, but covered call folks are very passionate about their 12% yields and the idea that this is not free money that they're just getting for being good people or something. They just don't want to hear it.
Dan Bortolotti: The cult-like following, I think it's a good distinction because I would say that there's a lot more willful blindness among people who follow a strategy like this compared with dividend investing for, and we've had this discussion many times. It may be suboptimal, but it's not crazy talk. There are a number of worse investment strategies than buying a diversified portfolio of blue chip dividend paying stocks and holding them for the long term.
That's not magic. Occasionally, you will hear people talk about dividends being free money, but I think those are a very small minority. Most people understand dividend investing for what it is, which is a perfectly legitimate strategy that doesn't involve hand-waving and magic thoughts like 12% yields.
Ben Felix: I agree with that. I think this is one of the biggest wins for the ETF industry. From a marketing perspective, covered call has been huge.
They've seen tons of inflows. They're one of the biggest, fastest growing ETF categories and people just eat them up. They love them.
Good for the industry for coming out with those products. It's too bad that it's coming at the expense of a lot of the people who are using them without realizing it. I saw there were a lot of comments on my videos on covered calls.
A lot of people were angry that I was saying this stuff about covered calls. A lot of people agreed with what I was saying. Then a handful of people, particularly on the second and third video, came and said, I commented a really angry comment in your first video, but it actually made me go and look at this and consider if what you're saying was actually true.
I've completely changed my mind now. You were right. That was interesting to see.
Dan Bortolotti: And humble to admit. Good on them.
Ben Felix: Totally, but it shows the power of the story with covered calls, where it takes someone seeing a video of some dude saying that this is not a good strategy for them to go and think, huh, maybe this isn't what I thought.
To cap this off here, the sloppiest version of ETF slop is single stock ETFs. These things are being issued in huge numbers, which makes sense because they're issued on individual stocks. If someone's like, I'm going to come out with single stock ETFs, they're not going to come out with one.
They're going to come up with a whole bunch, often on the popular stocks. They have high fees. They are complex tools for speculation, wrapped up in an easy to use vehicle.
They're being marketed, maybe not technically, because I don't think they're supposed to be marketed to retail investors, but you look at the website for these things and the titles of the products, like come on. It's like making flavored nicotine vape juice and saying they're not being marketed to kids. Like, okay, sure.
That's a pretty good analogy actually. Proud of myself on that one. There are two main types of single stock ETFs.
One focuses on positive or negative leveraged exposure to the individual stock. Daily leverage, which as you mentioned earlier, Dan, that's an important point. Then others offer income through covered calls.
Then some combine these two attributes, leverage and covered calls. Single stock covered call ETFs come with the same issues as covered calls more generally, with the added risks and volatility of individual stocks. They are marketed with names like "yield maximizer," "yield shares," "high income shares."
I believe to appeal to the mental accounting bias, where investors separate income and capital into different mental accounts. They want to go and buy yield. The idea that you can get a stock that you heard about or whatever that you know, and get a 10% yield, that's pretty exciting.
The problem as with covered calls more generally, is that the income yield comes at a cost of upside returns. You end up with high income, lower expected total returns, not a great combo. Some providers, not just in the single stock ETF market, but in covered call funds more generally, attempt to address this by adding in leverage.
I found in one of those videos I mentioned earlier, there was somewhere around 70% equity and 30% cash is like what covered calls look like. Some of these products are applying the covered call and then levering the whole thing up 25%. You've got 25% leverage on a single stock covered call strategy.
That does increase your expected returns, maybe back close to what it was before the covered call. You've still got a capped upside though, due to the covered call. You get the more extreme downside of a leverage position, which you do see if you look at the returns of these products.
You only get a little bit of cushion from the option premium on the downside. And you're paying for the cost of leverage. I just don't get why somebody would want to do this.
If you want to get your expected return back, just don't write the covered call in the first place. Some of these funds have expense ratios. Now, this does include the cost of leverage.
Important to mention, well above 1%. I saw some close to 2% as a total all-in cost of ownership. Of course, you're still exposed to the risk of an individual stock.
We know from looking at the long-term data, most individual stocks have long-term returns that trail the market. Many individual stocks suffer from large losses, which the covered call is not going to protect you from, that they do not recover from in their lifetimes. Those issues become more extreme when leverage is employed.
If we move past the covered call slash lightly levered covered call funds, the leverage single stock ETFs, those are going to magnify the already high volatility of single stocks. They come with their own weird characteristics and unique risks. Jeff Ptak from Morningstar looked at 2X single stock ETFs, which these are designed to produce 2X of the return on a single day.
If you look over time, you probably won't get 2X of a long-term return of the individual stock. A 2X leveraged ETF is probably not going to give you 2X the 10-year return of its underlying equity. Same for a leveraged index.
It's actually interesting, it's partially due to the fact they're rebalancing daily, but it's also just due to the fact that the leverage makes the thing more volatile. The compound returns of a more volatile thing are going to trail the less volatile thing, which is why you don't get exactly 2X return. That aside, Jeff Ptak looked at the daily returns and found that even then, in a lot of cases, you're not getting 2X the daily return with these products.
On the upside, you're getting less than 2X the daily return. On the downside, you're getting more. Why is that happening?
It's pretty interesting. It's because of the cost of leverage inside the funds. I mentioned the covered call leveraged fund.
The cost of leverage in that case showed up in the expense ratio. In a lot of these single stock multiple leveraged products, those costs are not going to show up in the expense ratio because the leverage is coming from swap contracts. You're not paying interest, which is going to show up as an expense in the expense ratio.
The financing cost is baked into the price of the swap, so it doesn't show up in fees. Man, just evaluating that is over a lot of people's heads. The financing cost built into these swap contracts has resulted in a pretty significant shortfall in returns of many of these leveraged single stock ETFs relative to their target daily returns.
Again, we expect a divergence over longer periods of time. Jeff Ptak's blog post is showing that over daily periods, you're getting pretty meaningful tracking here. Between high cost, high volatility, and the skewness in individual stock returns, I really think these leveraged individual stock ETFs face a lot of headwinds.
Hendrik Bessembinder, who's been on this podcast, we've talked about his research lots. He has a 2025 paper on leveraged single stock ETFs, which is super interesting. He sent it to me a while ago and basically said, given the research that I've done on individual stocks and on long term returns, this was a natural fit for me.
The paper is super cool. He finds that long levered single stock ETFs issued since 2022, so these are live funds, underperform a simple frictionless leveraged benchmark by an average of 0.79% per month. That's more than nine percentage points per year relative to his frictionless benchmark, with 0.26 percentage points of that attributable to the daily cost of rebalancing. That's the thing that you were talking about, Dan. 0.53 percentage points attributable to frictions like fees, the actual cost of leverage in the swap contracts over a risk-free borrowing rate, which is what he uses in the simple benchmark. They're underperformed by a lot.
Then inverse funds trail a simple benchmark by 1.01% on average. That's more than 12 percentage points annually. More of that is coming from daily rebalancing and a little bit less from frictions, but still coming from the same places.
Those are the live funds that he looked at. Then he said, okay, we've got a pretty small sample and a pretty short history of leveraged single stock ETFs. What if we simulate the returns of leveraged single stock ETFs going back in history?
He uses the CRISP database. I think he started at a market cap of a billion plus, so he wasn't looking at small caps and super small micro caps and stuff like that. He starts in 1974, so he does tons and tons of simulations over this period.
He finds that at a one-year horizon, a little more than two-thirds of hypothetical 3X leveraged single stock funds underperform a simple benchmark of just borrowing the money yourself to buy the stock. This is probably my favorite data point from this paper. 61% of the 3X leveraged single stock ETFs underperform the unlevered total market index return at the one-year horizon.
56% of single stock 3X hypothetical ETFs have negative absolute returns. If we go into 2X, the numbers are a little bit better, but still not great. In both cases, there's a non-trivial occurrence of total losses over a one-year period.
Then inverse funds, unsurprisingly, if we compare them to the market, they've done quite poorly. 62% of negative 1X funds and 68% of negative 2X funds would have trailed the market at the one-year horizon. I suspect based on, so he looks at shorter horizons and then longer up to a year, and the results get worse and worse up to the one-year horizon.
I don't know. I'd have to ask him why he didn't look at longer horizons, but I would expect that these numbers would get worse and worse as we go out past a one-year horizon. And these simulated results don't even capture the frictional costs observed in live funds, the fees and the financing costs.
Dan Bortolotti: I think of all of the categories that we've touched on today, this one is furthest into the Looney Tunes land because some of the others cater to some behavioral bias and they might lead to some disappointing underperformance, but this stuff is just driving a car into a brick wall. If you continue to use a strategy like this repeatedly, it just seems to me that the most likely outcome is $0. This doesn't make any sense as a long-term strategy in almost any context.
Ben Wilson: The thing I find fascinating with these structures is that people can hide or ignore the complexity that's in these funds using a leveraged ETF. There's leverage being employed through the swap contracts, but if that same person, let's say they're investing $100,000, they're unlikely to go and buy that individual stock, borrow an extra 200 grand and invest full amount in that stock, but effectively that's what's happening, but it doesn't feel like they're borrowing money because they're just buying this ETF on the stock market.
Dan Bortolotti: It might even be better, Ben, to do what you've described because you don't have that daily reset. It's that volatility that erodes these things. Of all these hypothetical funds that underperformed or had negative returns, my guess is some of those stocks probably had positive returns over that period.
It was this mechanism of the fund and the erosion caused by the volatility that resulted in the negative return, not the stock itself.
Ben Wilson: Exactly. The majority of investors would probably take my example and think that that's crazy and way too risky to consider, but someone might consider doing this levered ETF and taking a gamble basically.
Dan Bortolotti: And think it was safer. In fact, it's probably more risky.
Ben Felix: On the other hand, and again, this is speaking the perspective of, hey, this is pretty cool. You can't really get that kind of leverage in many cases as an individual investor.
Dan Bortolotti: That's fair.
Ben Felix: And now you can go and get it. You probably shouldn't, but the fact that you can is neat.
Dan Bortolotti: Many of these are theoretically interesting and from a detached intellectual perspective, you're right. It's cool engineering, but that doesn't mean I would buy them or recommend them in almost any circumstance.
Ben Felix: These products started to hit the market and when they started to hit the market, the SEC issued a warning to investors, which most individual investors probably didn't read, but they were worried about it. Picking individual stocks is plenty risky without 2X or 3X leverage on the positive or negative side. I think the last thing investors need is a tool that makes betting on or against individual stocks easier to do while charging a premium for the privilege.
We don't need more of that. Even though I said it's cool that we have it and it is, we didn't need that. Just like we don't need all of the gambling sites that exist now.
You can't even watch a basketball game, try and sit down and watch an NBA game and I'm inundated with gambling ads. What is happening?
Dan Bortolotti: It's really become very difficult to watch any sporting event without being inundated with that. And I worry about it a little bit. Once you start gamifying these sorts of things, it just becomes normalized.
The reason to watch sports is so you can bet on it. I think that there's some knock-on effects with investing. There's always been an element of that.
I just think these kinds of speculative products, the more normal they become, the more it sends a message to investors that investing equals speculation. That has always been part of investing and part of the appeal that people seem to have. They think of the stock market as a casino, but I think this just compounds the problem.
Ben Felix: It's condoning, supporting that behavior and it's easy. That's the thing. You could have gone and shorted or gone leverage long in individual stock before these products existed, but now it's a lot easier and you can do it on your Robinhood account or whatever.
Dan Bortolotti: Well, yeah, I was going to say you needed to know how to do it or Ben, to your earlier point about borrowing the money. You could have gone to the bank, borrowed 200 grand and bought a stock in theory, but probably no one would have done that because there would have been obstacles. They probably wouldn't have got approved.
They probably wouldn't have ever tried to do such a thing. Now, you can do it on your phone. It just normalizes what used to seem like extreme behavior.
Ben Felix: One other point on this is that in general, complexity in investment products has not been a good thing. There's a 2021 paper that looks at the allowance and use of derivatives, leverage and illiquid assets by mutual funds and finds that those complex instruments are associated with poor performance and higher risk. That paper is by some Canadian professors published in the critical finance review.
We did have Paul Calluzzo, one of the coauthors on this podcast, talk about that paper a while ago. Simple low cost products are likely the best tools for most investors most of the time. As John Bogle, the late founder of Vanguard said, you get what you don't pay for.
I mentioned earlier, I've got a quote from Bogle. Here it is. He called what we're seeing in the ETF market today back in 2015.
He wrote this piece for the Financial Times about ETFs and about his skepticism of the structure. He says, "I freely concede that the ETF is the greatest marketing innovation of the 21st century, but is the ETF a great innovation that serves investors?" I strongly doubt it.
"In my experience, almost 64 years in the fund industry, I've learned to beware of investment products, especially when they are new and even more when they are hot." Bogle has gotten some criticism for his skepticism about ETFs because ETFs have been in many ways very, very good for investors. In this article, Bogle actually says that index ETFs, as long as they're not used for speculation, are perfectly good vehicles.
He was more concerned about how the ETF wrapper was being used to create, at the time he was writing, there were, I think, 1,700 ETFs. He was like, that's way too many. He was talking about sector ETFs, things like that, that could be used for speculation.
Obviously, based on what we've talked about in this episode, it's gone much, much further than that, where tools that are very explicitly and really only useful for speculation have now been shoved into the ETF wrapper, which is great for the ETF issuer because they can charge higher fees for that product and the fees are much higher. But, for the end investor and to Bogle's point, I don't know if it's a net good thing, the way that the structure is being used now. I would say that Bogle was right back in 2015 and we have now entered the age of ETF slop.
Dan Bortolotti: Bogle was right about a lot of things. He had so much wisdom and I think you could take what he's saying here to an extreme. Here's an advisor who almost exclusively uses ETFs for his clients.
Obviously, I don't agree that they're problematic in that way, but you understand what he's saying and in 2015, if that was true, it is so much more true today. The temptation to go down the wrong road with ETFs is just so present right now. I think it's fair to say the vast majority of people who have ETFs in their portfolio are probably not using them in the way that you or I would say is the right way to use them, which is just as a way to get long-term exposure to an asset class at the lowest possible cost.
Ben Wilson: To link this back to the comment we made earlier that advisors themselves are not immune to this, especially if you're an independent advisor in a smaller shop who's running their business. There's a lot of demands on advisors. They're planning, they're fulfilling compliance requirements, they're doing client service, they're dealing with all the things that are involved with running a business.
So they only have a finite amount of time to dedicate to researching products themselves. They have an obligation requirement to do that, but they tend to rely on other experts to help them with their research and often the people that they're relying on to do their research are the people in their company, in their research department, which tends to be also the product manufacturers. So they're relying on the product manufacturers to feed them the information to help them make decisions for clients, which is not always in the best interest of clients and the best interest of the company and the marketing tools, marketing engine that exists.
One analogy that I think is worthwhile to kind of think of, when you're buying a car, you kind of do some of your own research, do enough to understand what you're looking for, maybe focus on some of the key features that are important to you like horsepower or cargo space or color or some of the key features that matter. And then you go on a test drive, but then you're relying on the expert, the sales guy to share the key features. And then obviously they're trying to make a sale, so they give you the positive features.
But if an advisor is part of a larger independent firm that has a dedicated unbiased research team, they can go into depth and provide research. So comparing that back to the car analogy, if you had a dedicated mechanic to help you make that decision and go through and say like, okay, what are the actual implications of car? What's the expected life on these types of vehicles?
Is there any things that we should be aware of over the longterm rather than just the things that you care about as an investor? When you're an advisor working with an independent firm that has a research team, you have access to unbiased advice that you may not have on your own in a small shop or even a bigger firm that's led or owned by a bank or one of the larger institutions that are manufacturing the products themselves.
Ben Felix: It's like you wouldn't go to a butcher to get dietary advice unless you're really sure that meat is the best thing for you, in which case you should only get advice from the butcher. That's it. Any other comments for you guys on ETF slop?
Ben Wilson: No. Ready to go to the after show?
Ben Felix: Not much in there. We got one review, nothing else. The Rational Reminder community has been popping. It's pretty neat over there.
Lots of folks having lots of good discussions. We have really good moderation team. I don't have much to say about it other than the Rational Reminder community continues to be a pretty neat place in the internet.
We do have one review from Apple Podcasts. Under SEC regulations, we are required to disclose whether a review which may be interpreted as a testimony was left by a client, whether any direct or indirect compensation was paid for the review, or whether there are any other conflicts of interest related to the review. As reviews are generally anonymous, including this one to an extreme extent, we are unable to identify if the reviewer is a client or disclose any such conflicts of interest.
Now, this name I'm pretty sure is just a keyboard mashing. A few Js in there, an H, an I, a W, B, U, C. There's no rhyme or reason to those letters, the way they're assembled.
They did say that this podcast is fantastic. They said, I haven't found anything like this out there for anyone with an intermediate level of investing knowledge. This is a great podcast.
Thank you very much to the anonymous reviewer that we did not pay. I am told with some confidence that we will, in this episode, have the funny disclaimer that Dan wrote. There was quite an uproar in the Rational Reminder community over the holidays because we said that we would be playing the new funny disclaimer.
I thought that we would have it recorded and that it would go into one of those episodes. Some people who really, really don't like the disclaimer actually listened to the disclaimer because they were expecting it to be Dan's comical version. When they were met with the normal disclaimer that they had already sworn off of listening to, they were quite frustrated.
I'm pretty sure that at the end of this episode, Dan's comical disclaimer will be played.
Dan Bortolotti: I have to be honest and say when I didn't hear it myself, I thought, oh, maybe they decided they weren't going to go through with this. It got squashed, but apparently not.
Ben Felix: It's going. My understanding is that it will be coming out at the end of this episode. There was one edit that Ross, people who listened to our year-end episode or that How the Podcast is Made episode will know who Ross is.
There's one edit from him, but overall, Dan, your disclaimer lived on pretty much as you wrote it. We should all get to hear it at the end of this episode.
Dan Bortolotti: Well, I think we're obligated to do it now, aren't we, Ben, after that preamble?
Ben Felix: No, you're right. We'd have some very angry listeners get the pitchforks out.
Dan Bortolotti: Well, enjoy.
Ben Felix: All right. Anything else?
Ben Wilson: I just want to mention that I'm planning to be in Vancouver, BC the second week of February, February 9th.
For any advisors that are interested in meeting up and just chatting, sharing notes, always happy to talk, reach out by email, LinkedIn, happy to talk.
Ben Felix: Every advisor listening should take Ben Wilson up on that offer if they're in Vancouver. I've had lunch with Ben before. It's an experience.
All right. Thanks, everybody, for listening. Thanks, guys.
Disclaimer:
Portfolio management and brokerage services in Canada are offered exclusively by PWL Capital, Inc. (“PWL Capital”) which is regulated by the Canadian Investment Regulatory Organization (CIRO) and is a member of the Canadian Investor Protection Fund (CIPF). Investment advisory services in the United States of America are offered exclusively by OneDigital Investment Advisors LLC (“OneDigital”). OneDigital and PWL Capital are affiliated entities, and they mostly get on really well with each other. However, each company has financial responsibility for only its own products and services.
Nothing herein constitutes an offer or solicitation to buy or sell any security. Occasionally we tell you not to buy crappy investments in the first place, but that’s not the same thing as telling you to sell them.
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Furthermore, nothing herein should be construed as investment, tax or legal advice. Even though we call the podcast “your weekly reality check on sensible investing and financial decision making,” you should not rely on us when making actual decisions, only hypothetical ones.
Different types of investments and investment strategies have varying degrees of risk and are not suitable for all investors. You should consult with a professional adviser to see how the information contained herein may apply to your individual circumstances. It might not apply at all. Honestly, you can probably ignore most of it.
All market indices discussed are unmanaged, do not incur management fees, and cannot be invested in directly. Which is a shame, because it would be awesome if you could.
All investing involves risk of loss: including loss of money, loss of sleep, loss of hair, and loss of reputation. Nothing herein should be construed as a guarantee of any specific outcome or profit.
Past performance is not indicative of or a guarantee of future results. If it were, it would be much easier to be a Leafs fan.
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Links From Today’s Episode:
Stay Safe From Scams - https://pwlcapital.com/stay-safe-online/
Rational Reminder on iTunes — https://itunes.apple.com/ca/podcast/the-rational-reminder-podcast/id1426530582.
Rational Reminder on Instagram — https://www.instagram.com/rationalreminder/
Rational Reminder on YouTube — https://www.youtube.com/channel/
Benjamin Felix — https://pwlcapital.com/our-team/
Benjamin on X — https://x.com/benjaminwfelix
Benjamin on LinkedIn — https://www.linkedin.com/in/benjaminwfelix/
Cameron Passmore — https://pwlcapital.com/our-team/
Cameron on X — https://x.com/CameronPassmore
Cameron on LinkedIn — https://www.linkedin.com/in/cameronpassmore/
Ben Wilson on LinkedIn — https://www.linkedin.com/in/ben-wilson/