The Newest Wave of ETFs Is Leading to Mini Bubbles

Exchange-traded funds have transformed investing. Thirty years ago, they started as a simple and tax-efficient way to access broad market indexes. However, the latest ETF launches have gotten more specialized, less diverse, and more expensive. The number of ETF launches set a new high in 2025, with over 1,000 new ETFs entering the fray.

The growing number of these niche ETFs has revealed a troubling pattern. Rather than solving real problems, many new ETFs hitch themselves to mainstream narratives. This usually occurs after the underlying stocks have already enjoyed a substantial boom in short-term performance. The creators of these ETFs are essentially just responding to demand from those chasing short-term returns. The irony is that these ETFs typically hit the market at or near a narrative’s peak, when valuations are stretched and expected returns are less optimistic.

The result is that investors end up holding speculative portfolios with high fees. Such ETFs do little more than amplify fanfare in their underlying themes, and they can contribute to small-scale bubbles that ultimately unwind to the detriment of those holding shares.

Why the Hype?

Asset managers operate in a competitive business where success depends on attracting investors’ attention and money. As a result, they tend to respond to themes that have already captured public imagination and generated strong recent returns.

Historically, similar ETF launches have clustered around periods when specific themes performed well, and it was accompanied by a compelling narrative, often about how the theme would “change the future.” Most recently, environmental, social, and governance-focused ETFs went through that phase in 2021, and ETFs tied to artificial intelligence and cryptocurrencies followed in 2025.

Rather than being driven by sound investing principles, most of these launches were timed to capitalize on enthusiasm. Social media amplifies these trends by highlighting eye-catching returns, while social sentiment spreads optimistic narratives.

ETF creators are clever, and they’re quick to recognize a receptive audience. They build new strategies and market them as timely opportunities to participate in the latest and greatest investment fads. This creates a cycle in which supply follows hype, but the opportunity to invest comes only after prices have neared a peak and valuations are stretched.

The Performance Problem

Because many thematic ETFs debut near a peak, they often face a difficult future from day one. Years of research across multiple market cycles show that thematic ETFs tend to lag the broader global stock market after launch, largely because they’re expensive and their valuations at the time of introduction are already inflated by previous performance.

The pattern can be observed in several recent periods. In 2021, 38 new ESG-focused ETFs launched following a very bullish 2020. As of February 2026, only 21 of those 38 remain. In this case, the high closure rate could be attributable to inconsistent or underwhelming performance, an inability to attract new investors, or both.

In 2025, 70 new ETFs were launched with a focus on digital assets and cryptocurrency. Some of these new ETFs simply track the price movement of cryptocurrencies like bitcoin, solana, XRP, ethereum, or dogecoin. Other ETFs within this group take already-volatile cryptocurrencies and add on a layer of leverage or an option that manipulates their risk/reward trade-offs.

These launches followed a couple of great years for cryptocurrencies. Bitcoin surged approximately 150% in 2023 and 125% in 2024. Unfortunately, investors in these newly launched ETFs did not experience a repeat of those spectacular returns. The price of bitcoin peaked in October 2025 and has since dropped almost 50%.

Investors who watched years of amazing performance from the sidelines and gave in to the optimistic marketing found themselves sitting on early losses, while diversified benchmarks continued to compound steadily. Over longer horizons, the combination of poor timing, volatility, high fees, and lack of diversification often leads to poor performance relative to broad market ETFs.

Concentration and Limited Diversification

While thematic ETFs may appear diversified on the surface, they are generally far more concentrated than investors expect. Most emerging or narrative-driven thematic ETFs include only a handful of stocks compared with broad-market indexes that have anywhere from 500 to over 5,000 holdings.

Of the 1,117 ETFs that launched in 2025, only 182 of them had more than 100 holdings. This means approximately 84% of the new ETFs that launched are considerably more concentrated than many investors realize. What’s worse, almost 46% of the 1,117 ETFs that launched in 2025 had fewer than 10 holdings.

Concentrated portfolios magnify the impact of stock-specific risk and cause fund returns to depend disproportionately on a small group of volatile stocks. Conversely, thematic ETFs that have many holdings may have achieved diversification by including stocks that are barely related to the concept marketed to investors.

For example, should an AI-centered ETF include companies building AI models, companies producing the hardware that makes AI possible, companies implementing AI into daily workflows, or companies attempting to compete in the space that have been unsuccessful thus far? How far should a theme stretch? At a certain point, the concept broadens out too much, and the ETF doesn’t really provide the targeted exposure that it claims.

Higher Fees and Mini-Bubbles

Fees have also started to move in the wrong direction. The average ETF that launched in 2025 came with a higher expense ratio than an established ETF. Furthermore, there is little evidence suggesting that the added cost reflected a benefit to the end investor. Many of these ETFs promised access to “new opportunities” or “next-generation ideas.” But their underlying methodologies were frequently simple rules or repackaged approaches that differed only marginally from existing, lower-cost options. In this sense, higher fees were less about improving the quality of the investment and more about a novel or narrow approach to an existing concept.

Increasing expense ratios are largely attributable to the rise of actively managed ETFs. Of the 1,117 ETFs launched in 2025, 943 are not tracking an index and would be considered actively managed. The equal weighted average expense ratio of this group weighed in at an astounding 76 basis points. The common link between these recent launches appears to confirm the worst: high fees, low diversification, and unwarranted complexity.

When the enthusiasm behind these overhyped products fades, the unwinding can be swift and punishing. Inflated valuations begin to normalize, leading to sharp drawdowns in the underlying stocks. ETFs built on small, speculative names can fuel those price declines when fear and selling pressure rise. This often coincides with a wave of ETF closures, as those that once attracted investors during the hype struggle to remain economically viable after performance falters. Investors, attached to previous prices, may hold on to losing positions in the hope of a rebound that never comes. Recency bias leads them to expect a return of the strong gains that first sparked interest in the strategy while searching for fundamentals that were never present.

In the end, many investors find themselves with losses that could have been avoided had they focused on sound principles rather than chasing returns. Ironically, trying to get rich quickly is often the slowest way to get rich.

What Investors Should Do Instead

First, realize that narrative-driven cycles are nothing new. Markets have been here before, and they’ve continued to survive and thrive over the long run.

The keys to long-term success haven’t changed. Diversification remains the first line of defense. Good ETFs diversify sufficiently to reduce stock-specific risks that are inherent in narrow themes. Fees deserve close attention as well. Higher expense ratios demand superior performance to make the expense worth it. Thematic ETFs have a poor track record, and most fail to outperform the global market.

A healthy dose of skepticism is warranted when themes dominate headlines. Trends that dominate the media and then emerge as the target of a new ETF often signal that the narrative has already been fully priced into the market.

The rapid growth of ETFs has unquestionably expanded the choices available to investors. However, many of the newest ETFs do not necessarily serve investors well. As the 2025 launch cycle illustrates, new ETFs have shifted from broad, low-cost diversification toward increasingly narrow, speculative, and high-cost strategies. They can reinforce market enthusiasm, drive short-term bubbles, and leave investors holding concentrated, poorly timed positions that struggle to keep pace with more broadly diversified ETFs.

ETFs themselves are not flawed. Rather, their expanding universe requires more scrutiny than ever. Investors must look beyond the ETF label and evaluate what they are truly buying. They must consider the number of holdings, the economic rationale behind the fluff, fees relative to alternatives, and whether recent performance reflects enduring fundamentals or temporary excitement. The idea is to avoid the pitfalls of narrative-driven ETFs and remain focused on strategies with a durable foundation.

ETFs remain powerful tools when used with the same care and discipline that defined their early success. In a market environment where innovation is abundant and hype travels quickly, thoughtful decision-making is still the most reliable safeguard.