Your fancy, new ETF might be a little too fancy

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Subscribe to enjoy similar stories. History teaches that financial complexity always creeps upward. Lately that trend has reached investor-friendly exchange-traded funds.

Last year, U.S.-based ETFs broke a record, surpassing $1 trillion in total inflows. They are cheap, liquid and, crucially, far more tax-efficient than traditional mutual funds. If you want to hold stocks and bonds, the flagship trackers from industry giants BlackRock, Vanguard and State Street Global Advisors already do the trick for very low fees.

It is tough, and not especially rewarding, to compete with those industry behemoths head-on. So Wall Street has found a new gold rush: packaging even the most sophisticated products in ETF form. About 30% of ETFs launched in the U.S.

in 2024 referred to some complex strategy in their names, an analysis of Morningstar Direct data suggests—double the average of the previous nine years. What it says on the label is becoming increasingly creative, and what happens inside of those funds is increasingly obscure. That complexity sometimes delivers a poor return compared with the plain vanilla variety.

After a dismal December, the Simplify Enhanced Income ETF—trading under the ticker HIGH—ended 2024 with a total return of 1.5%, despite its prospectus saying that “it seeks to provide significant supplemental income to T-bills." The SPDR Bloomberg 1-3 Month T-Bill ETF, or BIL, returned 5.2%. In addition to buying short-term paper, HIGH buys and sells “call" and “put" options to generate extra income, which amount to insurance policies against rises and falls in the price of some underlying asset. But this can create big losses whenever market volatility jumps, as happened in August and October.