1) INTRODUCTION:
François Doyon La Rochelle:
You’re listening to Capital Topics, episode #88!
This is a monthly podcast about passive asset management and financial and tax planning ideas for the long-term investor.
Your hosts for this podcast are James Parkyn and me François Doyon La Rochelle, both portfolio In today’s episode, review the ETF landscape for 2025 and what it has taught us about innovation, noise, and the need to staying disciplined.
Enjoy!
2) ETF MANIA: WHAT 2025 TAUGHT US ABOUT INNOVATION, NOISE, AND STAYING DISCIPLINED:
François Doyon La Rochelle:
In today’s podcast we will be diving into the ETF landscape after what was arguably a wild year for ETF launches both in the U.S. and in Canada. In 2025 more ETFs were launched than ever before, especially more active ETFs than plain vanilla index-based ETFs, and frankly I believe that a lot of those products don’t look like they were built with investors in mind. At least not those with a long-term investor mindset. So today we’ll ask a simple question: Is all this innovation helping investors?
James Parkyn:
Well Francois, as our regular listeners would suspect, our short answer is no. Most of these exotic ETFs are designed to capture the flavor of the moment investment trends, to gather assets in order to generate fees for the product manufacturer. But, more importantly for us, because we use broad market ETFs, it’s important for us to look at and assess the potential impact these products may have over the long term.
François Doyon La Rochelle:
The key issue for long term investors is that the flood of new ETFs is making it increasingly difficult for them and advisors to distinguish meaningful investment tools from the growing pile of distractions. So today we’re going to dive into why the ETF universe is exploding with new products, and what it means for building disciplined portfolios.
James Parkyn:
For our listeners today, Francois, we will try to stay at a high level because some of these new ETFs are quite complex to explain and difficult to understand. So, we will look at the big picture level and what investors should take away from all this.
François Doyon La Rochelle:
So, James, let’s start with the headline: 2025 was a record‑breaking year for ETF launches both in the U.S. and in Canada. In the U.S., we saw over 1,150 new ETFs being launched. That’s more ETFs being launched in a single year than what existed in total twenty years ago. And out of all these ETFs launched close to 65% of them were actively managed ETFs. There are now more actively managed ETFs than index tracking ETFs.
James Parkyn:
That is significant Francois because most investors equate ETF with Index investing. I must add Francois that, for the first time ever, there are now more ETFs available than individual stocks listed in the U.S. market. In a recent ETF research report by the National Bank there is a chart that shows that there are close to 5,000 ETFs trading in the U.S. currently.
François Doyon La Rochelle:
That’s wild James and it’s also true in Canada, there are now close to 1,800 ETFs in Canada. Imagine explaining that to someone in 2005 that the ETF industry would reach that threshold, they would think you are crazy.
James Parkyn:
I totally agree Francois; we at PWL have been investing in ETFs for over 20 years. At that time, PWL was recognized as the ETF guys because we were early adopters of all ETF portfolios. I remember back then there were only a handful of ETFs available for us to build portfolios.
François Doyon La Rochelle:
Yes, that’s true, now in terms of ETF launches here in Canada we are not far behind the U.S. given the size of our market. There were 364 ETFs launched last year. And again, like in the U.S., most of them, 239 to be precise or almost two thirds, are actively managed. And that does not include inverse/levered ETFs, crypto-asset ETFs and other sector ETFs. All these ETFs fall into the passive bucket but that we believe are tools used mostly by retail investors that trade them actively.
James Parkyn:
Again, François that’s a huge shift from the past. For years, ETFs were basically synonymous with low-cost index investing. Essentially, you bought an ETF because you wanted broad market exposure, low fees, Tax efficiency and transparency. Now the ETF product structure is being used for all kinds of other strategies. Like you’ve mentioned Francois: active strategies, derivatives, leverage, single themed investing. Investors must be really careful that they understand the underlying assets and the risk of investing in them.
François Doyon La Rochelle:
That’s it James and that’s where the concern starts. The ETF wrapper is neutral, it’s just a tool, a delivery mechanism but it’s what’s inside that really matters and that’s what is increasingly questionable.
James Parkyn:
I would add Francois that our colleague Ben Felix, in one of his recent YouTube videos, calls this tsunami of new products, the ETF slop. The point he is making, is that most of these new products are very low quality and produced in mass quantities like Artificial Intelligence generated products which is where the word Slop originated.
François Doyon La Rochelle:
Exactly, a lot of these products are designed with marketing in mind to gather assets and generate revenues and not with the investors’ long‑term benefit at the forefront. According to a National Bank Capital Markets report, the average management expense ratio, MER, for an ETF in Canada has now surpassed 65 basis points. This is far from the traditional broad based indexed ETFs that generally charges less than 10 basis points for Canadian or U.S. equities and slightly more for international and emerging markets equities. Luckily however this is a simple average of all ETFs, the asset-weighted average MER is half of that at close to 32 basis points, which shows that the bulk of the assets are still in lower cost ETFs.
James Parkyn:
Well, that’s really useful information Francois for our listeners. But there are some ETFs now with MERs above 1%. To me that’s mutual fund pricing dressed up in an ETF wrapper. The danger here is that investors see “ETF” and assume it’s low cost.
François Doyon La Rochelle:
Well yes, it’s just like walking into a grocery store, in the cereal aisle and believing that because they’re called cereal that they are all good for you but none of them are healthier than the basic oatmeal.
James Parkyn:
Well, I just happen to love Oatmeal, especially for the colder months of the year. Our regular listeners know our belief in broad-based, low-cost index ETFs in investing. It may be really boring, but they are now competing for investors’ attention with all noise in markets today.
François Doyon La Rochelle:
Exactly James and you know we have reached a certain point when ETF innovation is starting to look like a brainstorming session gone off the rails. And this is no joke; I read this in a Jason Zweig article from the Wall Street Journal that there is now an ETF based on UFO disclosure. The fact sheet says and I quote “The Tuttle Capital UFO Disclosure ETF (UFOD) is designed to invest in companies positioned to benefit from government disclosure, confirmation, or exploitation of advanced technologies tied to unidentified anomalous phenomena.”
James Parkyn:
Well, isn’t that the height of silliness François. This is where financial engineering meets entertainment. And while it’s amusing, it should also be a concern for investors. Because these products are not serious investment tools and in my opinion are clearly being marketed to retail investors who may not understand all the risks.
François Doyon La Rochelle:
Correct James, in addition to the investment risks, because these funds are tiny and niche products, they often gather only a few million dollars and they eventually shut down. In 2025, according to Morningstar around 150 active ETF closed or merged in the U.S. alone. I don’t have the data for 2025 for Canada but in the last two decades a recent article from the Globe and Mail stated that 654 ETFs have closed or merged in Canada.
James Parkyn:
That’s the other side of the story, record launches, but also record closures. If a fund doesn’t gather enough assets, the manufacturer is going to close it down. And that’s a really nasty experience for investors. They are left with consequences that are out of their control. These include the timing and the tax consequences of a liquidation.
François Doyon La Rochelle:
And it’s not just small firms that are closing funds. Even big names like Fidelity and ARK in the U.S. or BMO, RBC and Mackenzie here in Canada have shut down ETFs last year. If the assets under management aren’t there, the product disappears. Investors must understand that excitement doesn’t equal long term value and unfortunately those who don’t understand eventually figure it out at their expense.
James Parkyn:
Totally Francois. Investors must understand that new product manufacturers must compete with Global giants like Vanguard, BlackRock, and State Street. If you’re a new ETF provider, you’re not going to launch another S&P 500 fund because you can’t compete with them on scale and therefore have low fees. So, the business logic is that they go where the margins are better. That means single investment themes that reflect current trends, complicated derivatives and options overlays, and single stock strategies. In fact, anything that looks “innovative.” and may grab attention and therefore assets.
François Doyon La Rochelle:
Agreed James and let’s remember, the investment industry is not the investor’s friend, they are out there to make money and that’s why we are seeing this explosion of niche, complex and high fee ETFs.
James Parkyn:
Yes, and the industry plays directly on investor psychology with themes that tap into optimism and the belief that recent trends will continue. For example, covered call ETFs that tap into investors’ desire for safety of income. Another example is buffer ETFs that tap into investors loss aversion bias. Some more examples: Inverse or leveraged single stock ETFs and crypto ETFs that are built for pure speculation. By that I mean investors are making short term bets on Market direction.
François Doyon La Rochelle:
Absolutely James and the ETF wrapper makes everything look clean and accessible. It’s like putting a complicated machine inside a nice, simple box.
James Parkyn:
Exactly. And that’s why investors need to be extra vigilant. The wrapper is easy to understand, but the strategy inside it or the underlying assets may not be.
François Doyon La Rochelle:
Yes, and the marketing is powerful. The industry uses words like income, buffer, defined outcome, yield, AI, innovation and those key words all trigger emotional responses.
James Parkyn:
Yes, they do François, but it’s all marketing fluff. But the boring stuff like broad diversification, low fees, long term discipline, doesn’t get the same marketing budget.
François Doyon La Rochelle:
And there’s the irony James, while the ETF universe is getting noisier, the evidence for broad-based, low-cost indexing keeps getting stronger. Both the Morningstar 2025 Active versus Passive Barometer and the Standard & Poor’s, 2025 SPIVA report, drive this message home.
James Parkyn:
Indeed François. In 2025, according to Morningstar, only 38% of all active funds available in the U.S. survived and outperformed their average passive peer. It’s important to note here that the Morningstar study does not compare against benchmarks but against actual passive funds in which investors can invest.
François Doyon La Rochelle:
That’s an important distinction you make, James. The results for U.S. equity active funds managers were right in line with that number with a 37% success rate.
James Parkyn:
International managers did slightly better than U.S. equity managers with a success rate of 48%. The data shows that this is du in large part to emerging market managers, who posted a 64% success rate.
François Doyon La Rochelle:
Then you look at fixed income. Active bond managers’ success rates fell to 40%, down sharply from the year before. And in corporate bonds, only 4% of active managers beat their passive peers.
James Parkyn:
That’s a very poor result François. But then again, it’s the long-term numbers that tell the real story. When you look at the 10-year data through 2025, overall, in the U.S. only 21% of active funds survived and outperformed their passive peers. When you drill down into the U.S. large cap equity data, the long-term success rate was just 8.1%. This is significant because this segment is where most investors in the U.S. put their money. That’s more than 9 out of 10 portfolio managers who are unable to beat their passive peers over 10 years. Over 20 years, the success rate falls to a mere 6.4%.
François Doyon La Rochelle:
And the distribution of outcomes matters. Morningstar shows that in U.S. large cap categories, the penalty for picking the wrong active manager is much larger than the reward for picking a winner. The excess return distribution is negatively skewed.
James Parkyn:
Francois this only reinforces the point: even if there are some active winners, the odds are low, and the downside of choosing poorly is significant.
François Doyon La Rochelle:
And fees matter. Over the past decade, 31% of the cheapest active funds beat their passive peers, compared with 17% of the most expensive. A reminder that cost is important.
James Parkyn:
Now if we look at active funds in Canada, the results, based on the 2025 SPIVA Canada Scorecard, are not much different. The report highlights that 85.4% of active funds across all categories underperformed their benchmarks last year.
François Doyon La Rochelle:
Yes, and active funds benchmarked to large indexes like S&P/TSX Composite here in Canada, the S&P500 in the U.S. and the S&P Europe Asia-Pacific all failed miserably in 2025 since their underperformance rates were all above 89%. Over ten years, their underperformance rates are even worse, if not atrocious, with underperformance rates all exceeding 97%. Meaning that at best only 3% of active fund managers were able to beat their benchmark.
James Parkyn:
So, François to wrap this all up, let’s summarize for our listeners. What should they take away from the 2025 new product ETF mania?
François Doyon La Rochelle:
Well James:
First, don’t confuse innovation with improvement. Just because a product is new doesn’t mean it’s better.
Second, simplicity still wins. Complexity tends to increase costs, increase risks, and decrease transparency.
Third, stick to evidence. The SPIVA, Morningstar and decades of academic research all point in the same direction, active management does not work, especially in the long-term.
Fourth, investors need to filter the noise. The ETF universe is now a giant supermarket but with lots of junk food. To eat healthy, you need to choose wisely.
And finally, James, let’s remember words of John Bogle, the founder of Vanguard, and I quote “You get what you don’t pay for’’.
James Parkyn:
Well Francois, this quote is timeless. I would like to conclude for our listeners, as always, our goal is to help investors focus on what matters. The ETF universe may be getting more chaotic, but the core principles of sound investing remain the same: low fees, broad diversification, and long‑term discipline will pay off for long term investors.
3) CONCLUSION
François Doyon La Rochelle:
Thank you, James Parkyn for sharing your thoughts and expertise again today.
James Parkyn:
You are welcome, François.
François Doyon La Rochelle:
So, that’s it for episode #88 of Capital Topics!
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