Financial advisors assess ETF risks and rewards for 2026

U.S. ETF inflows reached a record $1.26 trillion year-to-date through November 2025. Total inflows were an estimated $147.7 billion for the month of November alone, lifting U.S. ETF assets under management to a hefty $13.2 trillion, according to FactSet.com.

November also saw the introduction of an impressive 118 new ETFs so the tide continues to rise for the investment vehicle heading into 2026. All of this begs the question as to which segments of the ETF market - fixed income, active, sector, or thematic – do advisors see as best positioned for inflows in the coming year.

Christian Salomone, chief investment officer at Ballast Rock Private Wealth, for one, believes that if the Federal Reserve continues to cut interest rates, investors are likely to rotate out of short-term fixed income ETFs into longer-duration bond ETFs and, to some extent, into equity ETFs. And given elevated equity valuations and concentration risk, like the Magnificent 7, within major indexes, he sees investors increasingly placing greater emphasis on risk management through vehicles such as buffered ETFs, which offer partial downside protection during market pullbacks.

“As monetary policy shifts throughout the year, we expect ETFs, including both traditional exposures and buffered structures, to play a central role in helping investors reposition portfolios efficiently while keeping an eye on risk management,” Salomone said.

Scott Dennis, head of ETFs at TCW, meanwhile, believes active ETFs are well suited to navigate economic uncertainty, shifting monetary policies, and market volatility in 2026. Their ability to adapt quickly across asset classes offers investors valuable risk management and growth potential, according to Dennis.

Index funds captured the majority (73%) of November inflows, according to FactSet.com, though actively managed ETFs still saw significant interest especially in the healthcare sector. 

“In fixed income, active ETFs can provide crucial flexibility to respond to interest rate changes and credit risks. Equities continue to offer opportunities for high-conviction active stock selection, particularly in sectors driven by megatrends like energy transformation and artificial intelligence. With market concentration at peak levels and many investors heavily tethered to indices, active management is well positioned to identify differentiated investments,” Dennis said.

Beyond market factors, Dennis believes tax considerations will play a growing role as many investors are sitting on significant capital gains after years of equity market gains, limiting their ability to reallocate. ETFs, especially active, offer a tax-efficient way to reposition portfolios without triggering immediate tax liabilities.  

Moving on, Corey Voorman, president and founder of Voorman Investment Counsel, says it is difficult to determine which ETFs will be the big winners in 2026.

“If past inflows for 2025 are any indication, then equity ETF’s are the clear majority of new products launched and the largest beneficiary historically. Single name leveraged ETFs and bull or bear variants have been a recent favorite amongst retail investors,” Voorman said.

ETF MARKET RISKS IN 2026

As to what structural or market risks within ETFs investors should keep an eye on in 2026, Ballast Rock’s Salomone says they need to pay especially close attention to the risks associated with rising leverage across markets, which includes the growing availability of explicitly leveraged ETFs. As volatility returns to both fixed income and equities, the daily rebalancing and hedging required by these products and other derivatives can amplify market swings and increase path dependency. As a result, this can lead to significant tracking error risks during prolonged choppy markets, according to Salomone.  

He also believes that sector-specific and thematic ETFs tied to overly concentrated, narrow indexes can heighten volatility and reduce diversification benefits.

“As ETF innovation accelerates, investors should carefully evaluate underlying mechanics such as derivatives usage, concentration risk, and the presence of true economic leverage to ensure their ETF investments align with their intended risk profile,” Salomone said.

Voorman agrees that leverage is often an unquantified risk in some ETFs.

“It’s similar to driving with a steak knife attached to your steering wheel: just because you made it to the grocery store unscathed doesn’t mean that even a minor accident can have catastrophic results. As ETF structure gets increasingly more exotic, care and prudence is necessary in choosing portfolio components,” Voorman said.

Finally, TCW’s Dennis believes investors should closely monitor ETF intraday liquidity and fee dynamics amid the rapid growth of active ETFs. He notes that with over 800 new ETFs launched in 2025, 85% of those actively managed, and share classes of mutual funds accelerating issuance, the total number of ETFs is set to surpass mutual funds by mid-2027. 

“Unlike mutual funds, ETFs rely on intraday liquidity providers who must commit significant capital, and as ETF offerings proliferate, liquidity providers will demand greater issuer support, raising barriers to entry,” Dennis said, adding that active ETFs currently charge about, on average, 25 basis points more than passive, and with active issuance growing rapidly, investors should watch how fees evolve amid increasing competition.