Latest / Bull Market Conversations with Fexingo: Rallies, Momentum, and Riding Market Strength / How Bull Markets Are Spawning a New ETF Arms Race
Transcript
- Lucas: So we're sitting here in mid-July 2026, the S&P 500 at 7,575, the Nasdaq up 0.6% on the week, and yet the Dow is actually down 0.8%. That divergence — it's not just a stat. It's the backdrop for something I've been watching closely. Luna: You're talking about the ETF filing frenzy. I saw a number this morning — over 1,400 new ETFs launched year-to-date. That's already a full-year record, and we're only halfway through. Lucas: Exactly. 1,400 products. To put that in perspective, the entire ETF universe ten years ago was about 1,700 funds total. Now we're adding that many in six months. And the catalyst? Part of it is the SEC's 2024 rule changes that streamlined the approval process. Part of it is just raw demand in a bull market where everyone wants a piece. Luna: And I think the Dow/Nasdaq split is really fueling it. If you're a retail investor who sees the Nasdaq ripping but the Dow flat, you start looking for ways to play that narrow tech strength. Enter the single-stock leveraged ETFs. Lucas: Right. The single-stock leveraged ETF space barely existed three years ago. Now there are products that give you two times or even three times daily exposure to names like NVIDIA, Tesla, Apple. They're controversial — the daily reset means they're not buy and hold vehicles — but they're flying off the shelf. Luna: And it's not just leverage. I was looking at Fidelity's new direct indexing push. They're basically letting you build a custom index of individual stocks and then trade it as an ETF wrapper. It's like active management dressed up as passive. Lucas: That's the key tension of this whole boom. The ETF structure was supposed to be simple, cheap, transparent. But when you have 4,000-plus ETFs on the market, and new ones launching at this pace, you have to ask: is this actually serving investors, or is it just product proliferation? Luna: Well, the fee compression has been great. The average expense ratio is down to like 0.37 percent. But at some point, the complexity itself becomes a cost. If you need a PhD to figure out whether a 3x leveraged semiconductor ETF fits your portfolio, maybe we've gone too far. Lucas: And the data backs that up. A study from Morningstar last month showed that the average investor in leveraged ETFs underperforms the underlying index by about 4 percent annually, mostly because they hold too long or trade at the wrong times. The product works as designed — but the user error is baked in. Luna: So who's winning in this arms race? The issuers, clearly. BlackRock, Vanguard, State Street still dominate the top of the market share table. But the real growth is coming from the boutiques — firms like Global X, Direxion, and a dozen new entrants. Lucas: And the SEC is watching. I saw a speech last week from a commissioner who basically said the agency is considering tighter marketing rules for complex products. The worry is that a retail investor sees '2x NVIDIA Daily Bull' and thinks it's just a faster way to own NVIDIA shares, when in reality it's a derivatives-heavy instrument that decays in volatile markets. Luna: Which brings me back to the market backdrop. In a low-volatility, steadily rising market, these products work beautifully. But the first 10 percent correction — and we haven't had a real one since 2022 — could be ugly. The liquidity in these ETFs is fine during normal times, but what about a flash crash? Lucas: That's the stress test nobody's talking about. The SEC's 2024 rules made it easier to launch ETFs, but they didn't really change the liquidity requirements for the underlying derivatives. So you could have a situation where the ETF trades fine but the swap counterparties get squeezed. Luna: And that's not even touching the thematic craze. We've got ETFs for artificial intelligence, space tourism, psychedelics, even one that tracks companies with all-male boards — which is basically a short on diversity. Lucas: Say what you want about the premise, but it highlights the creativity — or desperation — of issuers trying to stand out in a crowded field. And it works. Thematic ETFs pulled in $50 billion in the first half of 2026. That's real money. Luna: But here's the thing: most thematic ETFs have higher fees, lower liquidity, and a tendency to launch right after the theme peaks. The ARK Innovation fund was the poster child for that in 2021. It's down 60 percent from its high, but that hasn't stopped new thematic launches. Lucas: So the question for the listener is: how do you navigate this? I think the first step is knowing what you own. If an ETF has fewer than $100 million in assets or trades less than $10 million a day in volume, you're taking on additional risk that the prospectus won't tell you about. Luna: And read the holdings. A lot of these thematic ETFs are just repackaged tech stocks with a fancy label. The 'AI' ETF you bought might be 20 percent NVIDIA, 15 percent Microsoft, and 10 percent Alphabet — basically a tech index with a 0.75 percent fee. Lucas: Right. And that's where the bull market can trick you. When everything's going up, it's easy to ignore fees and structure. But the next downturn will separate the products that are genuinely useful from the ones that are just asset-gathering vehicles. Luna: Speaking of separating useful from not — I want to shift gears slightly. We talk a lot on this show about making smart choices with your money. And that's actually part of why we keep this podcast ad-free. We want the conversation to be clean, no sponsor pressure. Lucas: Yeah, and that's only possible because of listeners who choose to support the show. If you've gotten something out of these episodes — maybe you avoided a bad thematic ETF or thought twice about a leveraged product — and you want to help keep it going, you can find us at buy me a coffee dot com slash fexingo. No pressure, just a way to keep the lights on. Luna: Exactly. And we appreciate everyone who listens, whether you contribute or not. Now back to the ETF boom — I want to talk about what happens next. Lucas, you mentioned the SEC might tighten rules. What do you think the timeline looks like? Lucas: I think we're looking at late 2026 or early 2027 for any formal rulemaking. The SEC is still digesting the 2024 changes. But I do expect them to clamp down on marketing, especially for leveraged and inverse products. The question is whether they'll go after the underlying structure or just the labeling. Luna: And in the meantime, the issuers will keep filing. I saw a filing yesterday for a 'Meme Stock Momentum' ETF that would hold 25 stocks selected by Reddit sentiment analysis. That's not a joke. Lucas: It's not a joke, and it might actually perform well until it doesn't. That's the paradox. In a bull market, bad products can look good. The real test is whether they survive a bear. Most of these niche ETFs won't. Luna: So my takeaway for listeners: enjoy the innovation, but stick to the basics for your core portfolio. A low-cost total market ETF is still your best friend. And if you're tempted by a shiny new thematic fund, ask yourself: would I buy these stocks individually? If not, maybe skip the ETF. Lucas: That's a great rule of thumb. And if you do want to experiment, keep it to 5 percent or less of your portfolio. That way you're participating in the bull market excitement without betting the farm on a product that might not exist in five years. Luna: Alright, next time we'll look at one of these new ETFs under the hood — the direct indexing products from Fidelity — and see if they actually deliver better after-tax returns than a standard index fund. Lucas: Looking forward to it. I've got some data on tax-loss harvesting efficiency that might surprise people. Stay tuned.