The exchange-traded fund landscape witnessed an unprecedented surge in 2024, with a record-shattering number of new launches. More than 650 ETFs debuted, far exceeding previous years and highlighting evolving investor appetites and regulatory shifts. While innovation abounds, discernment remains crucial, as not all new funds are created equal.
This analysis delves into the standout successes and cautionary tales from this year's ETF cohort, providing clear insights for informed investment decisions.
Key Trends Driving 2024's ETF Boom
Several powerful trends converged to fuel this year's explosive growth in new exchange-traded funds.
The passage of the SEC's "ETF Rule" in 2019 continued to streamline the launch process, making it easier for issuers to bring new products to market. This regulatory shift has contributed to annual record-breaking launch numbers ever since.
A significant majority (78%) of new ETFs were actively managed. However, it's important to understand that many of these funds don't employ traditional discretionary management. Instead, they often follow rules-based approaches that minimize manager discretion while still qualifying as active strategies.
Three categories dominated new launches: options-related ETFs (25%), leveraged/inverse ETFs (10%), and digital assets ETFs (5%). This distribution reflects growing investor interest in sophisticated strategies and alternative assets.
Despite the influx of new funds, concentration persists within the ETF ecosystem. Over half of the industry's $10.7 trillion in assets remains concentrated in just 40 established ETFs, though newcomer iShares Bitcoin Trust remarkably infiltrated this elite group through unprecedented asset growth.
Evaluating the Best New ETFs of 2024
In a market where broad index funds have become commoditized, true innovation emerged from proven active strategies making their ETF debut. These funds combine time-tested approaches with the structural benefits of the ETF wrapper.
Jensen Quality Growth ETF (JGRW)
This ETF stands out for bringing a disciplined, quality-focused strategy to the ETF format with superior cost and tax efficiency.
The strategy behind JGRW boasts an impressive track record spanning decades through its sister mutual fund. The approach remains rigorously selective, considering only companies that have demonstrated returns on equity of at least 15% for ten consecutive years. This screening process creates a high-quality investment universe from which managers select through extensive fundamental research.
The resulting portfolio typically features steady growers trading at reasonable valuations rather than high-flying speculative names. While including established leaders like Apple, Microsoft, and Alphabet, the fund often holds lower-profile companies with durable competitive advantages, such as Zoetis in pet pharmaceuticals and McDonald's franchise operations.
This strategy has historically demonstrated defensive characteristics, tending to preserve capital well during market downturns while participating adequately in rallies. The ETF structure offers particular advantages for this approach by providing better control over capital gains distributions, making it particularly attractive for taxable accounts.
Neuberger Berman Small-Mid Cap ETF (NBSM)
This new ETF provides access to a proven small- to mid-cap strategy with the tax efficiency of the ETF structure and a focus on quality companies.
The strategy leverages Neuberger Berman's successful separate account approach that dates back to 1994. The experienced management team seeks profitable, high-quality companies with modest valuations, typically holding 45-60 stocks with low debt, high returns on assets, and defensible competitive advantages.
The team's thorough research process involves examining at least ten years of financial statements to identify growing free cash flow and assess capital allocation effectiveness. Positions are built gradually as investment theses are confirmed, and holdings are maintained for extended periods with gradual exits.
This approach has demonstrated reliable downside protection during market declines, though it may lag during strong market rallies due to its low beta characteristics. The strategy's sibling mutual fund, Neuberger Berman Genesis, has successfully managed substantial assets for years using the same philosophy, suggesting strong capacity management.
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Honorable Mentions: Best New ETFs
Several late-year launches showed promise but required more time for thorough evaluation:
Oakmark US Large Cap ETF (OAKM): This fund brings Oakmark's value-oriented approach to the ETF format, focusing on companies trading at significant discounts to their intrinsic value.
MFS Active Value (MFSV): MFS's inaugural ETF offering employs a disciplined value strategy seeking companies with strong fundamentals and attractive valuations.
iShares Bitcoin Trust (IBIT): While not a traditional equity ETF, IBIT's historic asset gathering performance merits recognition, providing efficient bitcoin exposure to mainstream investors.
Understanding the Worst New ETFs of 2024
While innovation generally benefits investors, some new ETFs appear designed to capitalize on speculative trends rather than serve long-term investment needs. These funds often feature complex strategies, high costs, and structural disadvantages that favor issuers over investors.
Successful long-term investing requires discipline and avoiding the temptation to chase short-term trends. As Warren Buffett has noted, investors often fall into the trap of following others' apparent success despite understanding the risks involved.
Defiance Daily Target 2X Long MSTR ETF (MSTX)
This fund represents a concerning combination of speculative assets, structural complexity, and excessive costs that create substantial headwinds for investor success.
The ETF's problems begin with its underlying holding: MicroStrategy stock. This company essentially functions as a leveraged bitcoin play, as its primary operation involves raising cash to acquire and hold bitcoin. Investors effectively pay a significant premium for bitcoin exposure, as MicroStrategy's market capitalization substantially exceeds the value of the bitcoin it holds.
The fund's structure adds another layer of complexity and risk. It employs swaps to achieve 2x daily leverage on MicroStrategy stock, but counterparty limitations have forced the fund to use imprecise options strategies to maintain target exposure. Since its inception, the fund has consistently failed to deliver the promised 2x leverage, with median daily leverage reaching only 1.77x.
Perhaps most concerning is the volatility drag inherent in daily leveraged products. These funds must reset exposure daily, buying more when prices rise and reducing exposure when prices fall—effectively buying high and selling low repeatedly during volatile periods. This structural disadvantage has caused nearly half of all leveraged ETFs to eventually close, with many delivering catastrophic returns before closure.
The fund's excessive costs further diminish its appeal. With an expense ratio of 1.29%, it charges over five times more than spot bitcoin ETFs while exposing investors to additional risks through its complex structure and premium-priced underlying holding.
YieldMax Short NVDA Option Income Strategy ETF (DIPS)
This complex options strategy ETF demonstrates how sophisticated investment products can create more problems than they solve for ordinary investors.
The fund employs a five-legged options strategy that attempts to generate income while providing limited inverse exposure to Nvidia stock. The approach involves taking a short position on Nvidia, selling put spreads to generate income, and purchasing out-of-the-money call options to manage potential losses from significant Nvidia gains.
This complexity creates multiple performance drags. The income generated from selling options comes at the cost of limited upside potential and potentially significant tax consequences. The protective call options continuously erode returns unless Nvidia experiences substantial gains, with current positioning requiring a 50% increase in Nvidia's stock price before the hedge becomes effective.
Since its July inception, the fund has somehow managed to lose more than 5% beyond Nvidia's gains, demonstrating the strategy's structural inefficiencies. Such complex products typically benefit sophisticated market makers and issuers more than buy-and-hold investors.
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Honorable Mentions: Worst New ETFs
Several other new ETFs demonstrated similar concerning characteristics:
T-Rex 2x Long MSTR Daily Target ETF (MSTU): Another leveraged MicroStrategy ETF suffering from the same structural issues as its counterparts.
Direxion Daily Uranium Bull 2X ETF (URAA): A leveraged sector bet that combines niche exposure with daily reset drawbacks.
2x Ether ETF (ETHU): Leveraged cryptocurrency exposure that amplifies the already substantial volatility of digital assets.
Frequently Asked Questions
What makes an ETF "good" or "bad" for long-term investors?
Quality ETFs typically feature low costs, transparent strategies, appropriate risk exposure, and structural advantages. Problematic funds often have high expenses, complex strategies that benefit issuers, excessive turnover, or structural flaws that create performance headwinds.
How can investors evaluate new ETF offerings?
Look beyond marketing materials to examine the fund's strategy, costs, historical performance of similar strategies, the issuer's track record, and underlying holdings. Consider whether the ETF solves a genuine portfolio need or simply capitalizes on current trends.
Are all leveraged ETFs problematic?
While not inherently bad, most leveraged ETFs use daily reset mechanisms that make them unsuitable for long-term holding. These products are designed for short-term trading and can suffer significant volatility drag over extended periods.
Why are active ETFs becoming more popular?
Active ETFs combine the traditional benefits of active management with the structural advantages of ETFs, including tax efficiency, transparency, and intraday trading. The 2019 ETF Rule made it easier for active managers to launch ETF versions of their strategies.
How important are costs when evaluating ETFs?
Expense ratios significantly impact long-term returns, particularly for strategies with modest expected outperformance. However, costs should be evaluated alongside strategy quality, as some actively managed funds may justify higher fees through superior risk-adjusted returns.
What red flags should investors watch for in new ETFs?
Be cautious of funds with excessive complexity, strategies that seem to capitalize on recent trends rather than enduring investment principles, high expense ratios, and structural features that might create performance headwinds over time.
Conclusion
The ETF landscape continues to evolve rapidly, offering investors both exciting opportunities and potential pitfalls. The best new ETFs of 2024 brought proven strategies to the ETF wrapper with improved cost and tax efficiency, while the worst offered complex, costly exposure to speculative trends.
Successful ETF investing requires focusing on long-term fundamentals rather than short-term trends, understanding strategy mechanics and costs, and maintaining discipline despite market excitement. By applying these principles, investors can navigate the expanding ETF universe effectively while avoiding products that prioritize issuer profits over investor outcomes.