My 2026 Thoughts and Predictions for the ETF Industry

Rising Retail Risk Appetite for CLO ETFs

Collateralized loan obligations, or CLOs, are steadily migrating from an advisor-only corner of the market into broader investor conversations. They bundle pools of senior secured loans and slice them into tranches with different risk and return profiles, governed by a strict waterfall structure.

This design, along with interest coverage tests and other structural protections, is what differentiates them from the pre-crisis CDOs many investors still associate with 2008.

The timing is notable. Private credit had a rough 2025. Both listed and unlisted BDCs traded at persistent discounts to net asset value, and idiosyncratic issues, including fraud-linked loan exposure at subprime lenders, reminded investors that credit risk never disappears. Against that backdrop, CLO ETFs, particularly those focused on higher-quality tranches, have held up relatively well.

That resilience, however, has not yet been tested in a true liquidity crunch. ETFs holding CLO tranches are still a recent innovation, and it remains unclear how they would behave in a stress event like March 2020, when even plain-vanilla bond ETFs briefly traded at sharp discounts to NAV.

What stands out to me heading into 2026 is the move down the capital stack. We’ve already gone well beyond AAA exposure, with BBB and single-B CLO ETFs now firmly on the menu. In my view, it’s only a matter of time before someone attempts an equity-tranche CLO ETF, or a leveraged version of lower-rated tranches.

Demand is there. On platforms like Reddit and X, yield-hungry investors are increasingly fluent in these structures, whether they fully understand the risks or not. That education gap is something the industry is going to have to confront.

Return of Capital and the SEC’s Growing Patience Problem

I don’t have a philosophical objection to derivative income strategies. Many of them are transparent about what they do: sell upside in exchange for immediate cash flow. Whether that trade-off is attractive depends on execution, option pricing, and volatility conditions. Add taxes and expense ratios into the mix, and underperformance versus the underlying asset should not surprise anyone.

What does concern me is how aggressively some products are marketed. In particular, single-stock derivative ETFs advertising eye-catching distribution yields in the high double digits or even triple digits. When you look past the headline yield and examine total return charts, the picture is often grim. NAV erosion can be severe, especially when compared with simply holding the underlying stock.

A recurring pattern in these products is heavy reliance on return of capital (ROC). While ROC is not inherently bad, and can be tax-efficient in certain contexts, it is still your own money being handed back to you. It reduces your cost base and, once exhausted, sets the stage for future distributions to be taxed differently. That nuance is frequently lost in marketing.

The SEC has shown in the past that it is willing to intervene when ETF practices raise red flags, whether around naming conventions or liquidity concerns. I would not be surprised if ROC heavy derivative ETFs eventually attract similar scrutiny, either through investor complaints or regulatory review. If a yield looks too good to be true, history suggests it probably is.

Buffer ETFs Versus Traditional Asset Allocation Debate

One of the more heated industry debates I followed in 2025 centered on buffer ETFs and their role relative to traditional asset allocation strategies like the 60/40 portfolio.

The arguments have been loud and public, with critics questioning whether buffer strategies offer anything meaningfully better than a simple mix of stocks, bonds, or cash once fees and timing complexity are considered. Proponents counter with clearly defined payoff ranges, behavioral benefits, and ease of use for advisors constructing client portfolios.

I don’t have a side in this fight. If anything, I welcome it. These debates force the industry to stress-test ideas rather than accept marketing narratives at face value. What I do find interesting is why buffer ETFs have gained so much traction in the first place.

In my view, the surge reflects investors fighting the last war. The trauma of 2022, when rising rates and inflation pushed stock-bond correlations positive, is still fresh. Even now, as rate cuts come back into focus, many advisors remain anchored to that experience.

That doesn’t mean buffer ETFs are wrong, or that traditional allocation is suddenly superior again. Each has scenarios where it shines and scenarios where it disappoints. The more important takeaway is to understand the incentives behind the loudest voices in the room, and resist the urge to assume that the next crisis will look exactly like the last one.

Please note this article is for information purposes only and does not in any way constitute investment advice. It is essential that you seek advice from a registered financial professional prior to making any investment decision.