ETF Edge - The 2026 ETF Outlook: Increasing Complexity 1/5/26

Episode Date: January 5, 2026

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The ETF Edge podcast is sponsored by InvescoQQQ. Let's rethink possibility. Investco Distributors, Inc. Welcome to ETF Edge, the podcast. If you're looking to learn the latest insights on all things, exchange, traded funds, you're in the right place. Every week we're bringing you compelling interviews, thoughtful market analysis, and breaking down what it all means for investors. I'm your host, Dominic Chu.

2026 is off and running, and ETF investors have already got a lot ahead of them. to help plan, here's my conversation with Jay Jacobs, U.S. head of equity ETFs at BlackRock, alongside Todd Rosenblu, the director of research over at Vettify. Let's talk a little bit about the ETF edge, I guess, thematic investing playbook as we head towards the bulk of 2026. We're here now. It's our first trading day of this real, real new year, right? And we had, you know, we traded on the second, but this is the first real full week of 2026 investing. So maybe Jay, we'll start with you. You work at the biggest asset manager in the world, and you guys have a lot of different products out there. If I was to try to pin some of the big

themes that you will be looking for in terms of ETF and thematic investing in 2026, what would they be for you? What would they look like? Well, I think it really is about these three different categories. The first is really what are the biggest growth opportunities in the market today, where you have to get laser focused to try to find some of these more targeted exposures like artificial intelligence that could do very well in this environment. The second is, and maybe more relevant for retirees, is where are you going to get income from? We are in a falling interest rate environment. We expect some cuts this year. We need to find new sources of income to diversify your portfolio and generate income from it. And the third, as we see these bouts of volatility

and maybe unpredictable aspects of the market, where can you really get diversification for your portfolio? Something that's going to behave. differently from stocks and bonds, so you can have more ballast to, you know, weather the storm of different volatility events. Todd, this is interesting as well, because for the better part of, you could argue maybe the last five or six years, certainly since the pandemic, there has been a kind of press your bets and get rewarded type mentality, meaning the places that have worked, have really worked, and if you kept putting more money into those places, you've ridden a huge wave. And AI is probably just one of those stories, right?

One of those places. At what point, though, why would investors want to get off of that train right now? And why would they want to look at things like diversification? If those places had been working so well for so long, what signs have you seen that they are not going to work as well as they have in the past few years? So I guess a couple of things to that. One, I do think some of the themes that worked in 2025 are going to be relevant again in 2026. So AI is still going to be a popular theme.

team to invest in for the overall marketplace. We've seen it for ETFs that are targeted and have AI in the name. Jay has a team have a fund that's BAI is the ticker that's been very popular or was very popular in 2025. We've seen some other products that are AI adjacent nuclear energy, for example. The Range Renaissance Nuclear Energy ETF and UKZ was up 55% in 2025. And we think that those trends are likely to continue. But what we saw in December that was interesting to me is we started to see investors move into small cap ETFs.

They were out of favor for much of 2025. They underperformed. Small caps is an area that could perhaps perform well in a lower rate environment. And so we've started to see small caps gain attention. Does that persist in 2026? We think it might. And if it does, then there's a range of different ETFs that are available. It's an interesting point, Jay, because the idea of a broadening out trend,

has been talked about fairly for the last 10 years, and it hasn't really materialized. It really has been, for the most part, in a simplistic view, all about two or three key sectors and parts of the market, and you could argue maybe seven to 10 of the biggest stocks in the market as well. If you look at the way things have shaped up over the last 10 years and why things may be different this time around, people are not necessarily getting out of, say, AI, tech, comm services and consumer discretion. but they're looking at other places in the market as well.

Where exactly do you think that search leads them to? Well, we actually brought out an entire suite around this concept because if you look at the market and the level of concentration that you see today, you could say it's either a feature or a bug, but it's reaching historical levels of concentration. And so we've brought out different ETFs to really be able to break apart things like the SMP 500 or the NASDAQ 100 to really be able to play this concentration in the markets.

You want to overweight some of the biggest mega-cap tech names. Do you want to broaden it out and go equal weight across the S&P 100? This gives you a lot of different ways to kind of build a ETF portfolio and really try to manage or lean into that concentration risk. So we've seen a lot of flows into top T, which is the top 20 names in the S&P 500. We've also seen a lot of flows into OEF, which is an equal-weight version of the top 100 names in the S&P. It's really about people kind of thinking about building a portfolio and how much concentration risk they want in that portfolio.

Just how much more complicated is it going to be, Todd, given the fact that there are so many ETF offerings out there and that you have to stay on top of the types of holdings each have, the types of maybe style drifts that could happen, the things that may overconcentrate you in certain areas, but under expose you in others, how much more active, so to speak, do ETF investors have to be given the idea that many of these moving parts are now moving at a pace that we haven't seen over the course of the last 10 years. So there's a few ways to think about that. One is, are you active on your own?

Are you investing in an active ETF where the stock picking is being done by the portfolio management team, whether that's BlackRock, whether that's TROPrice, whether that's capital group? There are all these firms that have brought their best managers into that space. And even if they have a narrow parameter as to where their areas of focus are, that's going to shift month to month, potentially quarter to quarter, certainly. Even if you're on an index-based product, we just went through a rebalance period that typically happens in December tied to the VETIFI products, tied to S&P index-based products. A number of strategies look different today as we are in early January than they did a month ago.

For example, Victory shares has a free cash flow, ETF, V-flow. We had V-FETA-Refi or the index provider behind that. It added energy and health care companies as part of its rebalance. So that's a good thing in that it's following the rules of the rulebook. But as an investor, that's a good thing that you want to see that it's changing. But you need to stay on top of it. You need to make sure that you understand what is inside your ETF, whether it's active index-based, or even if it's market cap-weighted because the S&P 500 adds some companies from time to time.

The active element is something we've spoken about at length for at least the last year, maybe even two at this point, because the emergence and evolution of the number of actively managed exchange traded funds in the marketplace has been powering much of the ticker growth, if you want to call it that, within the ETF universe. Many of the newest ones out there are more actively managed type products, right? So Jay, if that's the scenario, many of these active ETFs are ones that target the three buckets that you just mentioned at the top of the show. Many of those ones are giving specific tailored exposure to certain types of strategies and certain types of either products or industries or anything like that.

If you look at the way that has set up, what exactly does that fit into like for those three buckets? Are we looking at active ETFs as the main driver or cornerstones of each of those three types of themes? Or are you still looking for an index-based option that then you built alpha around given some of those actively managed functions? Every portfolio is going to be different, but I think one of the reasons active is resonating in this environment is there's just, there's more volatility and there's more dispersion across different asset classes and frankly different sectors as well. So it gives the opportunity for active managers to generate alpha and to outperform. If you look over the last 10 years, the

S&P 500 has delivered something like 13 and a half percent annualized, but if you look going forwards, many people expect that to be lower. So if you're trying to get the same kind of returns you've been accustomed to, you might have to start getting some alpha from an active manager to help make up that difference. We certainly see it in the growth space, one of our fastest growing ETFs last year was BAI or actively managed AI fund. This is managed by Tony Kim. He's really looking for what are the leaders in artificial intelligence going forward. If you look at that income category, we've seen funds like Bali or Ball Q where you have a systematic active strategy, which is not only looking to harvest dividends from different dividend payers, but

also write options overlays on top of it to generate more income. And then finally, if you look in that diversification bucket I mentioned, we have a multi-strap product IAult, which is incorporating kind of many different alpha strategies into one ticker to generate alpha while providing diversification versus stocks. Well, that's an interesting one as well, because if you take a look at a product like that, right, where you have placed your money in a manager or a team of managers' hands to diversify on their own to give you at least a little respite, if you will, from having to manage all of that on your own, yes, that's going to be a big diversification tool, but is it something that investors are increasingly looking towards, this kind of outsourcing of that, if you will,

Jay, this idea, right, that you can actually get some kind of a multistrat return without having to do a lot of those components yourself. That's right. I mean, we like to call it kind of an easy button for alternatives, which maybe is a little bit kind of conflicting. But the idea is that alternatives are a great concept for portfolios, that they can provide a measure of diversification. But often where you see investors get hung up is, what are the alternatives I should get exposure to? How do I know what to allocate to different alternatives? Should I be dynamic about it? Should I be static about my exposure to different alternatives?

I alt really wrap-solve that decision-making into one ticker. That's why it's kind of the easy button. Whether you want to get kind of dynamic macro exposure, where you have a strategy that's looking to go across different countries or different macro asset classes, whether you're trying to get equity market neutral across individual securities to find relative value, or you're looking at something that's going to try to play different style premium and credit or equities. All of those are often individual decisions investors have to make, but with IELT, it's all wrapped into one ETF. So you can just say this is my diversified, multistrat, alternative strategy in my portfolio. We talked a lot over the course of the last decade in ETFs, you know, Todd, about the notion of hedge fund-like strategies, right?

You know, we talk about things like factor-based momentum-type models. We talk about things like maybe the use of options and futures, commodity trading advisor type strategies that are now embodied in ETF format. What kind of demand have you seen from your standpoint, kind of across the entire ETF landscape, about some of these products, I'm going to call them hedge fund like. We're not really calling them that these days, but you kind of know what I'm saying.

That they're not traditional strategies. They are certainly more alternatives based to Jay's point. So it's not a huge category yet, but it's growing both in number of supply of products and in demand. So Calamos, for example, is a firm that's brought out an autocolable suite of ETFs. The first one they brought out is C-A-I-E. And they've scattered over $500 million in assets in a relatively short time period, offering income in an alternative format. And that's interesting.

We've talked about private credit, and we've seen some of the firms bring direct exposure or indirect exposure to private credit to get exposure through the ETF wrapper. And then there's other just long, short strategies that are available. Some of them have been around a while and haven't gathered assets. There's some firms that have brought some of their expertise into the ETF marketplace. And then I would consider, and maybe we'll get there, but I would consider Bitcoin and the demand for Bitcoin ETFs to be an alternative as well. And there's been very strong demand in direct Bitcoin exposure or using,

options to be able to enhance the income. Neos, for example, has a relatively new and popular product, BTCI, that's offering income and Bitcoin exposure in one strategy. Now, the cryptocurrency side of things is something that has gained a lot more traction over the course of the last couple of years, especially because large-scale asset managers like BlackRock now have options to invest in equity-like formats in terms of ETFs, but using exposure for things like Bitcoin and Ethereum. BlackRock has iBit, it has ETHA, right? Those are two of the big ones out there that track the two biggest cryptocurrencies. What exactly do you see as the future for crypto investing with ETF investors using those vehicles to gain their crypto exposure?

It's still so early. You know, it's only been less, it wins its anniversary in a couple days, two years since Ibit originally launched, and we've seen it raised tens of billions of dollars. But still many investors have still just been starting their educational journey around what is Bitcoin, how might it fit in a portfolio? For many financial advisors, maybe they didn't have access to crypto before or even weren't able to buy IBID until it was approved on their platforms. We're starting to see a much more broader group of people that can and are interested

in investing in this asset class. So we see this still being very early days for Bitcoin and Ethereum. It's a lot more about education, a lot more about how does this fit in a portfolio, how might it behave in different market environments, and how could it sit alongside stocks and bonds. Now, Todd, the crypto story

is not one that's new for crypto investors to the direct cryptocurrencies themselves, but the democratization, if you will, of the markets because of the ETF business and the ETF industry has allowed more access to these types. of exposures for traders and investors who don't typically are not categorized as say crypto-native. What exactly have you seen that suggests that this ETF, I guess, focused crypto-type investing really has maybe longer-term momentum?

So I think last year was a great example of there was volatility tied to Bitcoin. Ibit will use that as the example. Saw some price volatility. I think it finished down for the year and still had one of the best years in terms of asset gathering. So it shows that investors that are moving in to getting exposure to cryptocurrency through the ETF wrapper have some loyalty to the product, have confidence in the long-term trends. They're not necessarily moving in or moving out based on that volatility. So that, to me, makes it feel like an advisor or an investor is offering an allocation to cryptocurrency

as an alternative, and then they're sticking with it. They're not necessarily selling out and looking for another alternative so quickly. So I would compliment BlackRock and their shareholders for staying relatively loyal, given the volatility that we saw. Okay. And because it is the first show of 2026, I'm going to close out our interview here with the same question for both of you guys. And I'm going to start with you, Todd.

As an ETF industry watcher, what are you most excited about in seeing develop for ETF markets in 2026? So I'm excited to see what happens with share classes of ETFs of mutual funds or mutual funds of ETFs. We got the first round of approvals from, I think it's 31 different firms now have the green light in 2026 to bring their products through a different wrapper to the marketplace. I don't know how many of them and how aggressive they're going to be in that, but that's something that I have my eye on.

I'm going to be watching that. and we have the exchange conference coming up in a couple of months. I think by then we'll have a lot of people who have started their journey of bringing their strategies into the marketplace. I'm excited to watch that. Yeah, we'll see what the mile markers are once more people get involved as well. What excites you the most? I'm glad it gets to go second after Todd. I'm most excited about the growth of the liquid alts category in ETFs.

As Todd mentioned, this is a smaller category today. But as we see volatility in the markets and as we see people really try to build out more holistic portfolios using ETFs, I think the Liquid Alt's category is going to play a really important role in helping manage through these different bouts of volatility. Now it's time to round out the conversation with some thoughtful analysis and perspective to help you better understand ETFs with our Markets 102 portion of the podcast. Todd Rosenbluth, Director of Research over at Vetify, continues with us now. Todd, I'd like to maybe start the conversation kind of where the digital show ended. and that is about what the playbook is for 2026 and just how important say some of those alternative type investments are.

If I were to ask you what you think is going to be the hottest stuff that goes on in ETFs in 2026, part of that playbook, what would you say that those things are? So I think alternative income streams is an area that was in focus in 2025, but I think we're going to see more of that in 2026. We've had the Fed cut interest rates, multidis, times in 2025, they might continue to do so in 2026. We'll see what happens. But we saw investor interest in enhanced income, alternative income. We can come up with a number of different ways of phrasing. Now, Todd, those are all interesting terms. What exactly goes into? What exactly

is alternative income or liquid alts? What are those things and how exactly do they fit into ETF investing? So what we've seen in a number of firms, and Jay was talking about BlackRock's own but the other firms like Goldman Sachs or Nios, these are firms that use options to get exposure to a broader investment style, whether that's the S&P 500, the NASDAQ 100. I talked about briefly earlier about getting even options income tied to Bitcoin. And so what you get is a little bit of downside protection through the options and a higher income stream. So you can get 8, 10, 12 percent returns.

through an income stream, through monthly dividend payments using the options. And we've seen popularity. So Goldman Sachs launched a couple of years ago, I think, a suite of products, one tied to the S&P 500, one tied to the NASDAQ. And it's already gathered over a couple of billion dollars. Neos has had success. BlackRock has had success. So I think we're going to find investor interest in these enhanced income strategies as a way

not stocks, not bonds. It has some similarities to both those asset classes. And I think we're going to find many more investors are using ETFs as an easy button to get that exposure. Defined outcome is another term that we've heard a lot. And that kind of explains a little bit about what you're saying. Some of these funds with a, say, core index exposure that then write or sell options on top of that to either and or create income and or use those premiums to buy downside protection for other parts of the portfolio as well. How exactly does that then play into, say, the traditional split or allocation that investors have? Do those now take the place of certain core holdings? Could you envision some of these defined outcome-based

ETFs, the ones that use options and futures to generate enhanced returns and or protection and income? How much did they become core parts of the portfolio? So we're starting to see that happen. So we had VETIFI, do virtual events with financial advisors, and we're hearing more and more from advisors that are using a either downside protection ETF, Innovator is a firm that has products, Calamos is a firm that has some products in that category, First Trust as well. They're using the downside protection of the S&P 500 as a replacement for IVV,

which is the I shares S&P 500 ETF or VOO, which is the Vanguard S&P 500 ETF, they're using it as a replacement or they're using it to complement. So instead of getting the full downside protection, you're getting partial to have exposure there. I think that's a trend that's going to continue. We're likely to see,

we usually think we're going to see volatility in the new year ahead. We'll see if that happens. But many people are nervous. Three straight great years of the S&P 500. It can't last forever, is the mindset for many investors. so why not consider an ETF that protects you on the downside,

makes that a little bit easier for you to sleep at night with your portfolio? One of the other topics that we kind of touched upon during the show itself was this notion that there is an enhanced focus on diversification. For the longest time now, at least in recent memory, if you got it right with regard to just being in technology, media, telecom-type companies, those ones who are focused on mega-cap technology and communication services, you've done very well for yourself. You're now saying that there's going to be more of a focus this time around about diversification. One of those diversification elements has been in alternative type investments,

whether that be physical gold or silver and the exposure to those prices or even cryptocurrencies themselves. How much more do those alternative type strategies involving alternative type assets play into the playbook for 2026? So I think it worked last year in some regards. So gold was an outperformer. If you invested in gold ETFs as part of your allocation, you would have been rewarded. It did better than the S&P 500. If you invested in international equities, it would have been a better performer than the S&P 500. So I think diversification worked in some parts last year. Bitcoin didn't perform as well for people who thought Bitcoin was going to be additive to their portfolio. It detracted.

And as we talked about earlier, we didn't see people moving significantly out of those pre-existing allocations. So I think diversification is going to matter more and more. I touched on earlier when we were talking about small caps and whether or not small caps gets that investor interest in the new year ahead in a lower rate environment. We shall see. But there's a lot of great ways to get small cap exposure, whether a market cap weighted approach tied to the Russell 2000 or the S&E. P-600 or more fundamentally weighted approach. Victory shares has a free cash flow, ETF. We have a number of firms that are out there that have quality as part of a focus.

Investco has one that comes to mind. So I think we're going to see diversification be important again for investors in 2026. Not every of those arrows is going to hit the mark. Now, the expectation, one final question before we leave, the expectation for the markets, at least from an equity standpoint, is more or less a consensus that we could see maybe low double-digit returns in the coming year, at least as of this particular show and taping. With that expectation context in mind, given our current situation, how exactly then do you see ETF investors evolving their methodologies in the coming year?

So I think if you expected more muted returns for 2026 and what we've seen in the last, couple of years, then you'd want to try to lock in some of that, whether that is tied to the downside protection, ETFs we talked about, or enhancing the incomes, so getting a little bit more of your total return from an income stream and not relying on the broader market to rally as much. I think we're likely to also see if we have a more muted year that value investing could perhaps work. If the market broadens behind or beyond technology and consumer discretionary, to financials, to energy. You want to make sure you have exposure to those sectors

through a value or even a more broadly diversified ETF. So I think we could see some of the areas that we're not as in focus in 25, return to focus in 26. We'll see if that broadening out trade has legs for sure in 2026. Todd Rosenbluth of Bedify, thank you very much for joining us. A pleasure to be here. And happy New Year.

Happy New Year to you. All right. Well, that does it for the ETF Edge podcast. Thanks for listening. Join us again next week or just head over over to ETFedge.c.com for all of our content. We'll see you next week. Over the last few decades, technology has transformed our world in amazing ways. Through it all, InvescoQQQETF has connected investors to the forefront of innovation.

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