The U.S. exchange-traded fund market reached a new milestone in mid-2026, with $15.8 trillion spread across 5,401 domestic funds, according to Morningstar's latest industry review. The report, authored by analysts Zachary Evens and Daniel Sotiroff, highlights a market that is both expanding rapidly and becoming increasingly complex.
More than 1,000 new ETFs launched in 2025 alone, and the pace has continued into 2026. But the products entering the market are no longer just simple index trackers. Morningstar categorizes ETFs into three generations: traditional passive funds, active and factor-based strategies, and a newer wave of derivative-driven products that the report's authors say resemble gambling more than investing.
Passive dominance persists, but active gains ground
Index-based ETFs still hold the lion's share, accounting for 87.5% of total assets. Three S&P 500 funds—Vanguard's VOO, iShares' IVV, and State Street's SPY—alone represent roughly 17% of all money in U.S. ETFs. Yet active management is steadily eroding that dominance. Active ETFs now hold $1.47 trillion, growing at a 59% compound annual rate over the past three years, according to ETF.com.
The growth was catalyzed by the SEC's 2019 ETF Rule, which simplified the launch process for active managers. However, performance data remain sobering. The SPIVA scorecard from early 2026 shows that 79% of actively managed large-cap U.S. equity funds underperformed the S&P 500 in 2025, and over a decade, only 24% of active ETFs have beaten their benchmarks. Despite this, assets keep flowing in, partly because many active ETFs are not trying to beat the market. Providers like Dimensional Fund Advisors, J.P. Morgan Asset Management, and Capital Group offer systematic or rules-based strategies that sit between pure indexing and discretionary stock picking.
Mutual fund conversions and dual share classes
A structural shift is also underway as fund companies migrate to ETF wrappers. Since Guinness Atkinson converted two funds in March 2021, another 208 mutual funds have made the switch through June 30, 2026. More consequential is the rise of dual share class funds, which allow both ETF and mutual fund investors to access the same portfolio. The SEC approved several such structures in late 2025, and on December 17, 2025, issued a combined notice of intent to approve applications from 30 additional firms. This development simplifies portfolio construction for advisors managing clients across taxable and retirement accounts, as they can now use a single strategy for both.
Third-generation ETFs raise concerns
The fastest-growing launch categories in 2026 are trading-leveraged equity funds (218 launches in H1), defined outcome ETFs (65 launches), and derivative income products (46 launches). Derivative income ETFs attracted roughly $54 billion in net new assets in 2025, making them the most popular active category that year, with total assets near $130 billion. Defined outcome ETFs use options to cap losses in exchange for capped gains, but they rely on similarly complex mechanics.
Morningstar is blunt about what lies ahead: more than half of ETFs in the pre-launch queue aim to manipulate the returns of a single stock using derivatives, and the authors conclude that most soon-to-launch products look more like gambling than investing. The low barrier to entry is evident in the rise of white-label providers like Tidal, which as of June 30, 2026, served as listed advisor or subadvisor on 410 ETFs with $60.4 billion in assets.
Not all third-generation ETFs are problematic. Morningstar highlights two tax-focused innovations—box-spread ETFs and funds seeded through Section 351 conversions—as promising for tax-sensitive clients. Box-spread ETFs package an options strategy that delivers short-term bond-equivalent returns with no distributions, so investors realize capital gains only when they sell. As of the report date, six such ETFs were available in the U.S.
Advisor takeaways
For most investors, the strategies that built the industry—broad, low-cost, tax-efficient index funds—remain the most defensible core. Active ETFs can play a legitimate role, particularly rules-based systematic strategies with multi-year track records. But the derivative-driven segment warrants caution. Advisors should also monitor the ongoing shift toward dual share class funds, which could streamline how they manage client portfolios. For more on related trends, see passive core ETF inflows and active ETF launch trends.
