The Best and Worst New ETFs of 2024
Another year, another record of new ETF launches—we weigh in on this year’s best and worst.
This year’s tally of new exchange-traded funds didn’t just break the previous record of launches—it smashed it.
More than 650 new ETFs have launched as of Dec. 5, 2024, beating last year’s record by more than 150. Each year has marked a record of ETF launches since the advent of the US Securities and Exchange Commission’s “ETF Rule” in 2019. The rule made it easier to bring new ETFs to market.
Still, a couple of trends contributed to this year’s record:
- Options-related ETFs (25% of new ETF launches), leveraged/inverse ETFs (10%), and digital assets ETFs (5%) led the way.
- Active ETFs represented 78% of new launches. Although technically not index-tracking, many new active ETFs don’t use traditional discretionary active management like we’ve come to expect from mutual funds. Case in point, most of the ETFs with strategies categorized by the above bullet are technically active, but their investment process involves little to no manager discretion.
The influx of ETFs into the market has left it bursting at the seams, with 3,850 available for investors to choose from. About 5,800 ETFs have been launched since SPDR S&P 500 ETF SPY debuted in 1993. This means a third of them have since closed.
More ETFs means more opportunities for closures. So far, that hasn’t been the case in 2024. This year’s crop of shuttered ETFs (160, so far) should end up with less than last year’s record of 202.
Longtime favorites continue to control most of investors’ assets, despite the growing menu of ETFs available. Over half of ETFs’ $10.7 trillion in assets is parked in the top 40 ETFs. That list is littered with decade-plus old ETFs, at least until newcomer iShares Bitcoin Trust IBIT infiltrated the group of veterans by posting the fastest start in ETF history in terms of asset growth.
With all this in mind, our ETF research team has analyzed the class of 2024 and voted on the best and worst new ETFs launched this year. Here’s what we found:
Best New ETFs of 2024
Most broad indexes and asset-class exposures have been commoditized by ETFs, leaving little room for innovative index ETFs. It’s no surprise then that this year’s crop of best new ETFs belongs to proven active strategies available for the first time in the ETF wrapper. Investors should take notice of these new ETFs:
Active ETFs have been around since 2008, but they’re still a relatively new phenomenon. A few catalysts were responsible for active ETFs emergence over the past few years:
- The ETF Rule’s passage in 2019 gave active managers more flexibility when using the ETF wrapper.
- Costs and tax efficiency have played an increasing role in investment decisions by investors and advisors.
- Portfolio managers have grown comfortable, or at least tolerant, of daily portfolio transparency.
A key aspect of evaluating an actively managed fund is looking at its track record, both in terms of performance, security selection, and timing. Since the active ETF market is so new, active ETFs often build their asset bases without historical performance to lean on.
But not all active ETFs are starting from scratch. Traditional mutual fund managers have found their way to the ETF market, often by reproducing well-worn strategies in an ETF wrapper.
This year’s best new ETFs target different markets, but each leverages a strategy over 30 years in the making. A long track record should give investors confidence in these new ETFs.
Why We Like Jensen Quality Growth ETF
This ETF’s sister mutual fund has long delivered competitive returns with lower volatility. My colleague, Dan Culloton, shares more detail below. Read his full analysis.
Jensen Quality Growth ETF has a couple of attributes that many new active exchange-traded funds lack: a time-tested process and an established history.
The team still adheres to the strategy’s proven, selective process. The firm’s August launch of this ETF version of Jensen Quality Growth created a cheaper and more tax-efficient way to invest with this team and approach. The essentials of its bottom-up, high-conviction process remain, though. It won’t consider investing in a company unless it has posted returns on equity of at least 15% for 10 straight years. That screen gives the team a high-quality pond of businesses in which to fish. The managers run whatever they reel in from that pool through dozens of hours of fundamental research to arrive at a couple of dozen steady growers trading at reasonable valuations.
The resulting portfolio can be hard to categorize, but it’s still a worthy holding. It rarely owns the highest flyers because they tend to fail the strategy’s profitability and valuation tests, though it does own Apple, Microsoft, and Google parent Alphabet. Owning mostly lower-profile growers can lead to steadier results. Zoetis, for example, dominates pet pharmaceuticals, and the McDonald’s restaurant franchise has endured numerous challenges and cycles. The strategy has tended to lag in rallies but hold up well in downturns, leading to strong risk-adjusted results.
The new, identical ETF has the same risk/reward profile. Since its structure allows better control over capital gains distributions, however, it could offer a more tax-efficient way to invest in a strategy with a lot of embedded long-term gains that has seen recent outflows. Such conditions often precipitate end-of-year distributions. The mutual fund’s 2023 long-term capital gains distribution, for example, amounted to 7% of its net asset value. Jensen has not yet declared its 2024 distributions.
Dan Culloton, Morningstar director
Why We Like Neuberger Berman Small-Mid Cap ETF
This new ETF gives investors access to Neuberger Berman’s successful separate account strategy with the tax efficiency of ETFs. Quality plays an important role in the success of small- and mid-cap strategies over the long run, which this strategy has in spades. Expect a smoother ride than peers.
My colleague, Chris Tate, shares more below. Read his full analysis.
Neuberger Berman Small-Mid Cap ETF’s proven team and disciplined approach possess many hallmarks of an appealing smid-cap strategy.
The teams’ wealth of research resources inspires conviction. Strategy stalwart Bob D’Alelio, alongside two longtime team members Brett Reiner and Greg Spiegel, share responsibility for this portfolio. Though the exchange-traded fund is newly launched in March 2024, the trio have long been involved over the separate account’s history, which dates to January 1994.
The strategy’s disciplined focus on profitable, high-quality companies with modest valuations sets it apart from most. Its managers seek to own 45–60 stocks whose underlying businesses have low debt, high returns on assets, and defensible competitive advantages. Their analysts study at least 10 years of prospects’ financial statements to find growing free cash flow and assess how it’s used. The managers then build new positions gradually, making sure their thesis is correct, and will hold for long periods and exit gradually.
While this ETF is still building its asset base, the teams’ sibling Neuberger Berman Genesis, which adopts the same philosophy and process, held $15 billion in assets as of June 2024. This scale makes it one of the largest in its small-growth Morningstar Category, so capacity bears monitoring given the material overlap in the two strategy’s portfolios. However, they have prudently managed a hefty asset base for years and shown no signs it has inhibited their investment style. The separate account boasts a similar return profile: absolute returns that often lag in rising markets owing to the portfolio’s low beta (a measure of volatility relative to the benchmark) but reliable downside protection during market declines.
Chris Tate, Morningstar senior analyst
Honorable Mentions for Best New ETFs of 2024
Oakmark and MFS launched their first ETFs in December. Since their launches occurred the week before this article published, we lacked time for the necessary due diligence to crown these as the best new ETFs of 2024. That said, we rate similar mutual funds highly. Our initial analysis of the ETFs can be found here.
Worst New ETFs of 2024
Successful long-term investing requires discipline. Few can ignore the siren’s call of short-term riches and maintain a long view. Warren Buffett believes that not succumbing to FOMO (my characterization, not his) is one of his biggest edges as an investor. In an interview with Charlie Rose years ago, Buffett described why investors fall into this trap, saying, “You can’t stand to see your neighbor getting rich. You know you’re smarter than he is, but he’s doing all these crazy things and getting ric … …so pretty soon you start doing it.”
Plenty of ETF issuers are more than happy to help investors scratch that gambling itch. The golden age of volatility is upon us, be it through investing in crypto, leverage, or derivatives using ETFs. Investors see people getting rich and can’t help but enter the frenzy. Most don’t end up rich.
Investing in crypto or derivatives isn’t inherently bad. But many of these products knowingly set up investors to fail in the long run. High fees, exorbitant risk, and costly derivative exposures can be a recipe for disaster in the long run. This year’s worst new ETFs follow this recipe.
Why We Don’t Like Defiance Daily Target 2X Long MSTR ETF
This ETF is a Russian nesting doll of problems. It starts with the single stock it tracks: MicroStrategy MSTR. This company is essentially a leveraged play on bitcoin, since its main operation is raising cash to buy and hold bitcoin. But it started as a software company in 1989, long before bitcoin was even a twinkle in Satoshi Nakamoto’s eye. Its stock flew high into the dot-com bubble until its share price popped after disclosing it needed to restate financials in 2020. Shortly thereafter, the company and its executives, including MicroStrategy’s current executive chair, Michael Saylor, were charged with fraud by the US Securities and Exchange Commission (they eventually settled with the SEC without admitting wrongdoing).
MicroStrategy created and sold various software product lines over the next two decades before turning its attention to bitcoin in 2020. Now, the company owns over 400,000 bitcoin worth over $40 billion (assuming bitcoin’s price at $100,000). The company’s market cap, however, is over $90 billion, between 2-3 times higher than the value of the bitcoin it holds. Surely investors would rather pay a dollar for a dollar’s worth of bitcoin rather than pay two or three bucks.
The second issue facing investors is the ETF’s structure. Not only does MicroStrategy trade like a leveraged bitcoin investment, the Defiance Daily Target 2X Long MSTR ETF adds another layer of leverage on top using swaps. When money flows in, the ETF’s portfolio managers must increase the swap exposure to maintain the 2-times daily leverage exposure to MicroStrategy stock. The ETF’s swap counterparties, which typically include banks and prime brokers, recently reached their limit and began rejecting the ETF’s plea for more swap exposure. According to a Wall Street Journal article, that has forced the ETF to use options in an attempt to double daily returns of MicroStrategy, although this method of leverage is imprecise. Since its August inception, this ETF’s median daily leverage was 1.77—a bit off from the 2 times on the tin, which is concerning. Worse, the ETF tended to better magnify losses than gains. The median daily leverage on up days was 1.73 versus 1.88 when down.
This ETF’s third issue is volatility drag. It’s forced to buy more exposure to MicroStrategy when its price rises and shed exposure when down. That means buying high and selling low repeatedly during choppy markets. This type of daily leverage reset kills ETFs. Nearly half of all leveraged ETFs and exchange-traded notes in Morningstar’s database have closed, a vastly higher rate than the rest of the ETF market. Even worse, 13% of all leveraged ETFs have returned negative 98% or worse since inception, yet most of them remain open for investment. The more volatility, the worse the results of the daily leveraged ETF. Unfortunately, the Defiance ETF’s standard deviation of returns since inception have been over 17 times higher than the S&P 500’s. This ETF stands to join junk heap down the road.
The ETF’s final issue is its cost. Any investor can go buy a spot bitcoin ETF for an annual fee under 0.25% and with no other embedded costs. Defiance Daily Target 2X Long MSTR ETF’s annual fee is over 5 times higher at 1.29%, and the costs don’t stop there: MicroStrategy’s executives are raking in millions of dollars for running this bitcoin holding company. And like mentioned before, MicroStrategy investors are paying a premium for their bitcoin exposure, which should fade away in the long run.
There’s not a lot to like about this ETF or ones like it.
Why We Don’t Like YieldMax Short NVDA Option Income Strategy ETF
This is the second year in a row on this list for YieldMax. Last year’s entry took a poor investment (single-stock ETFs) to the next level by selling call options against it. This year’s entry goes even further.
YieldMax Short NVDA Option Income Strategy ETF starts by taking a short position on Nvidia NVDA using options. It then sells a put spread on Nvidia to generate income, meaning if the price of Nvidia drops a certain amount, the ETF will stop benefiting from its decline for a stretch before it begins profiting again. But unlike most option income strategies, this ETF also buys an out-of-the-money call option on Nvidia “to manage potential losses” should Nvidia experience significant gains, according to the ETF’s website.
This presents a few issues. First, selling options is a trendy way to earn income, but the trade-off for that income is limited upside and a hefty tax bill. Second, buying a call option drags on performance unless Nvidia’s stock price increases substantially. The ETF currently owns an Nvidia call option with a strike price of $215, meaning the inverse Nvidia position would lose 50% before the call option stopped the bleeding.
This ETF includes five options legs to achieve what can only be described as an income-generating, tail-risk-managed, somewhat inverse Nvidia ETF. Since its July inception, the YieldMax ETF has somehow lost over 5% more than Nvidia has gained.
This ETF shouldn’t be on anyone’s wish list this Christmas.
Honorable Mentions for Worst New ETFs of 2024
The Best and Worst New ETFs Over the Years
Each year, the team looks at the best and worst new ETFs. Here are our picks since we started compiling them in 2015.
Our Best and Worst New ETFs Since 2015
The author or authors own shares in one or more securities mentioned in this article. Find out about Morningstar’s editorial policies.
United States