ETFs keep growing. They are not always index funds.

September 22, 2025

Financial creativity is on full display this year: alternatives, private credit, private REITs, crypto, stablecoins. But it is hard to understand these products, and part of the reason they are concerning is that many of them are new and have not been tested under duress.

At some point, markets will go down. They'll go down far and long, and it will feel depressing. Companies will stop naming themselves "Bullish Corporation" and going public.¹ But a market-capitalization-weighted index fund reflects the economy, and we have a lot of confidence that over time, in the United States, 340 million of us working hard will figure things out.

But in a more esoteric investment that you don't understand? Or perhaps a single stock that you didn't analyze correctly? Confidence dissipates rapidly. In periods of economic decline or uncertainty, if you don't truly understand what is driving the mechanics of the investment, you'll start to question your own decision-making as the investor. Instead of confidence, panic will creep in. Instead of thinking "This is kind of terrible but we'll get through it" you start to think "I have to change something or I'm going into the abyss."

My wife is in medicine and there is an active debate in our household about whether there are more quack medical or financial ideas floating around out there. She made the point the other day that "research exists so that people don't think their own experiences are scientific reality." I thought this was great and secretly wished I had come up with it! You can get into a real epistemological hole on this one when you start questioning your reality, but keep in mind that your experience and insights are just a sampling point in a set, just a dot on a curve. The very democratic index counts them all.

ETFs are proliferating. There are lots and lots of them, and it's important to know that an ETF *is not* necessarily an index fund. Initially most ETFs tracked indexes.

The financial industry realized that the public liked the term ETF, in part because the goodwill from indexing bled into ETFs, and the vehicle itself is good in many ways, like tax efficiency. So of course a lot of meetings got held and I am sure a lot of consultants got hired to mess up a good thing. "Let's package one stock, like Nvidia, in a triple-leveraged ETF" says Connor at the end of the table, sipping a colorful Alani energy drink in part to show his sensitive side while pushing this daring bro trade. And Maria is like "It's been 17 years since the global financial crisis, and I got through that ok when I was in 8th grade, and so I think these derivatives aren't so bad after all, so let's pack them into an ETF and I promise I'll come up with a nice-sounding name for it. I might use the word 'Freedom' in it, just letting you all know ahead of time.'"

4,300 ETFs later, Connor and Maria have their promotions, and everyone else is confused and buying things that are complicated and hard to understand.

Remember: you want to invest in indexes, and you might do so via a low-fee ETF or via a mutual fund.

~ Dan Cunningham

Notes
1. Though I do tip my hat to them on this one. Also Bearish Corporation as a name would have been even dumber.
2. Connor and Maria are hypothetical.