Mallika Mitra
3 min read
Since they hit the market in the 1990s, exchange-traded funds have transformed the investing landscape for retail and institutional investors alike. But the appeal of these low-cost, tax-efficient investment vehicles that can be bought and sold throughout the day like stocks has led to a growing number of ETFs that investors would be better off ignoring.
That’s according to a new report from Morningstar, which analyzed the 4,000 ETFs that traded on U.S. exchanges at the end of March 2025 and found that only 461 of them might be considered good, long-term options.
“There’s actually some validity in just looking for the biggest and cheapest and best stuff out there,” Daniel Sotiroff, senior manager research analyst for Morningstar and author of the report, told etf.com. “Use a lot of caution because there is a lot of stuff out there that doesn’t have great long-term merit to it.”
You don’t need to get too sophisticated in doing an initial screen for ETFs, Sotiroff said. He started by eliminating funds that didn’t have at least $1 billion in assets—a threshold he said is somewhat arbitrary but that he used to err on the conservative side. Just 738 ETFs of the 4,000 screened met that standard.
Larger ETFs “tend to be the stuff that investors have gravitated toward, and that’s usually because it tends to perform in the way that they expect it to over longer periods of time,” Sotiroff said, adding that larger funds have typically had to build up a track record and earn those assets over time. “There’s a certain level of safety when you start to get bigger.”
Next, he leveraged Morningstar’s fund ratings to include asset managers that the firm considers “above average.” This brought the number of funds down to 461. Few asset managers tend to launch “good ETFs,” according to the report: Avantis, Capital Group, Dimensional, Fidelity, JPMorgan, PIMCO, T. Rowe Price, Charles Schwab, BlackRock, State Street and Vanguard.
The motivation behind the analysis was to give investors “simple signals” to point them in the right direction as they are looking for ETFs to invest in. “This is not meant to be the end-all, be-all,” Sotiroff said. “We certainly do see smaller providers that have good stuff.”
More and more ETFs are coming out daily that may not meet the above criteria, including those focused on cryptocurrencies, niche themes and single stocks, according to the report.
For smaller ETFs, Sotiroff explained that there's a risk the fund may not garner interest and eventually the asset manager may decide to shut it down. If that’s the case and the ETF has gains, you may be on the hook to pay capital gains on top of having to find a replacement strategy while you have cash sitting on the sidelines. An asset manager may also decide to repurpose the ETF and change the underlying investment strategy, which means you’re no longer invested in what you signed up for.
