Morningstar Says Only 461 ETFs Are Worth Your Time

Morningstar reports that only a small fraction (around 11%) of the roughly 4,000 ETFs trading in the U.S. possess genuine value and long-term viability, with size and backing from highly-rated parent firms being key indicators of sustainability. The report cautions against investing in the flood of new ETFs, as many are small, gimmicky, and at high risk of closure, although Vetta Fi suggests that some new ETFs can provide targeted exposure or solve specific portfolio issues, like downside protection or active management alternatives.

Analysis

A Morningstar report indicates that only about 11% of the approximately 4,000 ETFs trading on U.S. exchanges possess value and sustaining power, with just 738 ETFs holding assets under management of $1 billion or more, and a mere 461 of those backed by parent firms with above-average or high Morningstar ratings. This analysis critiques the ETF industry's rapid expansion, evidenced by 757 new ETF openings 'last year' and over 510 in 2023, while only 174 closed in the former period, highlighting the risk of investing in small or gimmicky funds prone to closure, such as the Defiance thematic ETF or an American Century low-volatility ETF. In contrast, established ETFs with substantial AUM, like the iShares MSCI USA Min Vol Factor ETF (USMV) with $24.1 billion in assets and a 5.5% year-to-date gain topping the S&P 500, demonstrate greater resilience. However, Vetta Fi's Todd Rosenbluth notes that select new ETFs can offer portfolio solutions, citing examples like Calamos Bitcoin 80 Series Structured Alt Protection (CBTA) for bitcoin exposure with downside protection, Cohen & Steers Real Estate Active ETF (CSRE) for active real estate management, and iShares S&P 500 3% Capped (TOPC) for mitigating concentration risk from overweight constituents like Microsoft (MSFT) and Nvidia (NVDA).

Key Decisions for Investors

• Investors should exercise significant caution with new ETFs, prioritizing due diligence on assets under management, issuer stability, and the fund's underlying strategy to avoid premature closures or underperformance.
• Before investing in a new ETF, individuals should determine if it genuinely adds distinct value or addresses a specific portfolio need, such as offering downside protection, active management in a specific sector like real estate with CSRE, or managing concentration risk as seen with TOPC, rather than merely chasing recent trends or novel themes.
• Consider that while many new ETFs may be unsuitable, specific offerings like CBTA for managed cryptocurrency exposure or specialized active/thematic funds could be strategically beneficial if aligned with long-term investment goals and risk tolerance.