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“INVESTING IS SIMPLE,” observed HumbleDollar’s editor Jonathan Clements. “To be sure, you can make it ludicrously complicated.” And, indeed, Wall Street does just that.
According to a recent analysis by Bloomberg, the fund industry rolled out more than 640 new exchange-traded funds (ETFs) in the first half of this year—an average of more than three a day. There are now more ETFs in the U.S. than there are stocks (4,300 vs. 4,200). On top of that, private funds continue to launch at a fast clip.
How should investors respond to all of this innovation? I’d steer clear. While some of these new funds may be worthwhile, many are, in my view, witch’s brews that are unlikely to be useful.
Why? The standard reasons are well known. For starters, a large number of these new funds are actively-managed and, on average, actively-managed funds are more expensive than their index-based peers. As the late Jack Bogle used to say, when it comes to investments, “you get what you don’t pay for.” As a result, actively-managed funds, on average, have consistently underperformed their index-based peers. Active funds also tend to be more tax-inefficient than index funds.
There’s also Lindy’s law, which tells us that we should approach new investments cautiously—not because there’s an inherent virtue in moving slowly, but because, when it comes to investments, it’s important to see how they perform through multiple market cycles.
But those aren’t the only reasons I suggest avoiding these new funds. Below are additional considerations.
Complicated investments are often hard to categorize, and that makes them less-than-ideal from a risk perspective. Consider this pitch for a new fund: “The strategy actively rotates between equities, Treasuries, and cash depending on market volatility and trend signals. It’s fully rules-based, unemotional, and adaptable in real time.”
If you wanted to establish an asset allocation for your portfolio, with specific percentages in stocks and in bonds, this fund would be of no help. That’s a problem, in my view, because research has found asset allocation to be the most important driver of portfolio risk.
Black-box funds like this also make it difficult to estimate what level of returns they might deliver. That’s hard enough with traditional funds. But overly engineered funds make it that much harder. Consider this fund description, which arrived in my inbox this summer: “[Our fund] equips advisors with tactical exit strategies and patented indicators designed to limit downside and preserve growth.”
Or consider this pitch: “Our new tactical ETF…takes a dynamic approach to asset allocation, designed to help protect on the downside and participate when markets turn.” These descriptions sound sophisticated, but they provide investors with little idea of what they can expect. Peter Lynch, the retired manager of the Fidelity Magellan Fund, once offered this advice: “Never invest in any idea you can’t illustrate with a crayon.” That was as true then as it is now.
To the extent that funds are pursuing so-called tactical strategies, that should be of particular concern. According to a study by Morningstar, tactical funds are among the most risky out there. This is how Morningstar summed up the performance of this category: “They Came. They Saw. They Incinerated Half Their Funds’ Potential Returns.”
Another unwelcome trend on Wall Street is the use of what are known as “interval” funds. They’re designed to provide a bridge of sorts between private and public funds. As the name suggests, these funds allow investors to withdraw money only at defined intervals—monthly, quarterly or sometimes semiannually. That would be inconvenient enough, but redemptions are also capped, typically at 5% or 10% of the fund’s shares outstanding, so investors may not always be able to withdraw as much as they’d like if demand is high.
A related trend: Investment marketers are creating versions of the same sorts of “alternative” funds that have been popular with college endowments. This has always been a problem because individual investors typically can’t get into the same top-tier funds as big universities. Instead, what tends to be available are pale copies of what these big institutions are able to invest in.
Worse yet, recent evidence suggests that even those top-tier funds have seen returns deteriorating. It turns out that the boom in private equity was fueled in large part by the long-term trend toward lower interest rates. But with rates now higher, buyout firms have been having a harder time generating the same types of profits as before.
In an interview, a retired member of Yale’s endowment management team explained, “Just because something has worked for a particular set of institutions over some period of time, it’s not a guarantee of future success.” This is good advice.
Because the market for alternative investment funds is so challenging, these funds fail quite frequently. According to recent data, over the past 10 years, 75% of alternative funds have closed down. That can be a problem because fund closures can generate taxable gains, and this occurs much more frequently with actively-managed funds than with simple index funds.
Fundamentally, the challenge with all of these new funds is that no one has a magic wand. Especially when there are more funds than there are stocks, there just aren’t that many new ways to combine investments into something new and better than what already exists. Despite that, Wall Street continues to roll out new offerings every day.
How should you respond? Morningstar’s Jeffrey Ptak puts it best: “The more rhapsodic the sales pitch, the more you should plug your ears.”
Adam M. Grossman is the founder of Mayport, a fixed-fee wealth management firm. Sign up for Adam’s Daily Ideas email, follow him on X @AdamMGrossman and check out his earlier articles.
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[Our fund] equips advisors with tactical exit strategies and patented indicators designed to limit downside and preserve growth.
Reminiscent of a front-loaded fund we were sold in the late 90s by one of the leeches parading around the Middle East as investment advisors before I educated myself about investing for retirement. The fund had an automatic trigger to sell any stock that had lost 10% from the purchase price — essentially locking in any losses. I really took a bath on that “investment!”
After that experience I wised up and started using no-load funds.
INVESTING IS SIMPLE …
but that doesn’t mean it is easy for many people
Wow, another article about index funds.
This has been common knowledge for decades—that’s why Vanguard grew so much.
Another big reason is that U.S. capitalism is unmatched. Great earnings drive great performance.
And finally, the S&P 500 itself is a strong index: it’s low-cost, and it continuously adjusts based on company performance—essentially a built-in momentum strategy
Passive index investing is widely accepted as an appropriate strategy for most investors, though it’s not a perfect fit for everyone. The simplicity of passive allocation carries a price in today’s rapidly changing investment landscape. One common critique of the S&P 500 index is its increasing concentration, with a handful of companies—often fewer than ten—accounting for a disproportionately large share of the index’s weight and performance. This concentration raises concerns about high valuations for these few stocks. Even Morningstar editors have suggested that investors seeking broader diversification into areas like small-cap stocks, emerging markets, or fixed-income funds might find actively managed funds or ETFs to be a more suitable option.
“Unlike equity indexes, which reward success and size, bond indexes give more weight to issuers with the most debt, often those that are more financially vulnerable, meaning that passive investors may unknowingly take on heightened credit risk or interest rate exposure.” (from investmentnews.com July 14, 2025 article titled “Active Management is at the heart of fixed income strategy, says Morningstar” )
The Morningstar report is The Role of Active Management in the Bond Market | Morningstar
S&P Global reported that in calendar year 2024, 70% of general investment-grade funds outperformed passive index bond funds. Morningstar published similar conclusion in May 2025: “according to our latest Active/Passive Barometer, over the last 10 years, the cheapest active bond funds have outperformed passive peers in general”
Passive index investing is not confined to the S&P 500. Vanguard alone has 79 stock index funds. I do own their S&P fund, but I also own the Extended Market Fund, both in my IRA, along with Total Market and Total International in other accounts. I cannot imagine why I would want to add active management and associated fees, or switch to ETFs.
The investment biz is constantly in search of new “sizzle” to part dollars from unwary investors. I have come to the conclusion that much of the investment process is not all that hard. What is hard is not panicking when markets turn and having the discipline to start early and save often. There is nothing magical about this and most people can be taught the basics of how to manage their money. The investment business, on the other hand, makes the process look overly complicated, which requires the aid of an investment professional to navigate – even though the long term results of most such professionals isn’t all that special.
… Sorry! So, what do you suggest for investing?
A diversified portfolio of passive index funds:
https://humbledollar.com/money-guide/investing/
Thanks David!
Thanks for another thought provoking article. Now more than ever, go Bogle and Buffett. I use the S&P 500 index like VOO, and I am as happy as a clam.
“Never invest in any idea you can’t illustrate with a crayon” – that’s a priceless quote. Never heard it before, but have pretty-much practiced that concept as much as possible.
I have been reading Humble Dollar for a while now and enjoy the different perspectives on investing. I would like an article on Multi Year Guaranteed Annuities (MYGA) and how they could fit into one’s portfolio. Thanks
Jonathan has written a bit in the HD Money Guide about annuities, though I can’t recall anything specifically on MYGAs. I believe those are fixed annuities which behave like a bank CD or a Treasury note, paying a set yield for some term. Not sure why you wouldn’t just buy a Treasury note of the duration you seek; those would be far cheaper than an insurance product that does the same thing. Could be tax considerations, but I’m sure that’s already priced in to an MYGA.
One helpful HD tip: At the bottom of each Guide entry, there’s also a link to HD articles on that specific subject, for instance:
Fixed annuities:
https://humbledollar.com/money-guide/tax-deferred-fixed-annuities/
Income annuities:
https://humbledollar.com/money-guide/income-annuities/
Deferred income annuities aka “longevity insurance”:
https://humbledollar.com/money-guide/longevity-insurance/
Before some folks jump all over annuities — even the fixed income sort, please consider the specific role they might play in another reader’s financial plan. Remember too: here on HD we usually don’t know what another poster’s goals and needs might be. In other words, YMMV.
For inspiration, from JC himself:
https://humbledollar.com/2024/05/playing-their-part/
Excellent article. One of the key considerations for me with any asset before buying, whether house, car, boat or financial investment, is “How easy can I get out when I want to?” These new funds build in some ominous exit hurdles, and they won’t exactly have buyers knocking down the doors when I want to sell. That means I would likely have to take a bath to sell my shares. No thanks.
“crayon”…yes, and only use 5 colors (at most).
Two thoughts come to mind:
1) It really possible to overthink a problem and
2) When something looks too good to be true, it usually is.
“rhapsodic” nice touch –
I expect to same goes for most actively managed accounts at brokerage firms.
As always Mr. Grossman—an article of great value. Question—do you feel the target date ETFs (Schwab 2035 for instance) are over-managed/too much cost? I have viewed them as a cheap way to rebalance but interested in your view?
Nice article, packed with links to great resources. Thanks.