The first exchange-traded fund made its debut back in 1993. Known by its ticker SPY, the State Street SPDR S&P 500 ETF Trust offered investors something tried-and-true in an attractive new package. It’s an S&P 500 index fund that can be traded on the stock exchange throughout the day, with low costs and better tax efficiency than a traditional mutual fund.More than 30 years later, the ETF market is quickly stealing share from the mutual fund market—a reflection of investor preferences for low-cost index funds which are tough to beat. And the industry is continuing to churn out new ETFs: More than 1,000 were launched in 2025 alone, with even more coming in 2026.The good news is that investors now have a wide range of low-cost, tax-efficient ways to gain exposure to all corners of the global market. The bad news is that an increasing number of newer ETFs are taking on considerable risks in order to carve out a niche and compete. While State Street SPDR S&P 500 ETF Trust provides sensible, broad exposure to the US market, newer ETFs crank up risk in various ways. The latest ETFs offer leveraged exposure to just one stock, promise unrealistically high income, and provide exposure to all sorts of cryptocurrencies, among others.The strategies, assets, and risk exposures packaged in ETFs today have come a long way from the simpler ETFs that started trading in the early 1990s.Morningstar’s new State of US ETFs report covers the evolution of ETFs and sifts through the raft of new launches. Here, I’ll summarize the three generations of ETFs.Download the full reportETF 1.0: Where It All BeganETFs have tracked indexes for nearly half of their history. From 1993 until 2008, passively managed strategies were all ETF investors could allocate to. Those roots are still strong today despite a larger number of actively managed ETFs than passive ETFs. The largest 20 ETFs in the US still track indexes. Overall, passively managed ETFs claim more than 87% of US ETF assets. The largest three ETFs all track the S&P 500, with Vanguard S&P 500 ETF VOO and iShares S&P 500 ETF IVV recently surpassing State Street SPDR S&P 500 ETF Trust in total assets. These three account for 17% of all money invested in US ETFs, with the 20 largest ETFs making up 39%. The remaining 5,381 ETFs had USD 9.61 trillion spread across them. This is substantial, but it’s clear the ETF market is extremely top-heavy and skews toward those that are passively managed.The rapid growth of passive funds allowed ETFs to steal meaningful market share away from mutual funds. ETFs are still relatively young, though, and cede ground to mutual funds when looking at total market share. That may change soon. Since the birth of State Street SPDR S&P 500 ETF Trust, both mutual funds and ETFs have seen net inflows, but since 2019 mutual funds have been hemorrhaging money while ETF inflows have gone stratospheric. ETF 2.0: Branching Out From PassiveETFs had to branch out from their passive roots to become the preferred investment vehicle that they are today. While passive ETFs like State Street SPDR S&P 500 ETF Trust still prove hard to beat, low-cost index-based ETFs are commercially viable only for a select few with significant scale. Issuers in turn began launching more expensive ETFs in the 2010s to maintain their business success. Such ETFs include those that still track indexes but target narrow segments of the market or forgo market-cap weighting in favor of alternative means to beat the market rather than represent it. Other second-generation ETFs may be actively managed or invest in securities other than stocks or bonds. These helped asset managers gain business footing thanks to higher profit margins and growth potential.It took 15 years for Bear Stearns to unveil the first actively managed ETF in 2008. These types of second-generation ETFs grew steadily but struggled to make a mark. That changed in 2019 when the SEC issued Rule 6c-11. Later dubbed the “ETF Rule,” it made it far easier for active fund managers to enjoy the ETF wrapper’s tax benefits and not compromise their investment approach. The growth that ensued was no surprise.ETF 3.0: The Next Generation of ETFsThe mostly sensible second-generation ETFs gave way to a third generation of less sensible ETFs. These ETFs feature more complex investment processes, and many amped up risk in a variety of ways. Leveraged and inverse single-stock ETFs are the poster child for “ETF 3.0” as their risky short-term bets can win big or, as is more often the case, lose big. Relatively tamer defined-outcome ETFs also land in this emerging cohort and aim to cushion stock market losses. Common across this disparate group, though, are generally high fees and the use of derivatives.Most soon-to-be-launched ETFs look more like gambling than investing. More than 50% aim to manipulate the returns of a single stock using derivatives. This is a bleak future for long-term investors. Most investors don’t need these shiny objects, however, and can stick to proven approaches. A few firms have found lightning in a bottle with these risky bets and show the business opportunity in offering them. That’s why so many niche ETFs are in the launch queue. They don’t help long-term investors, but they do bolster fee revenue for the ETF provider.While many recent ETF innovations prey on some of humans’ worst instincts, a few in this cohort do show promise. While first- or second-generation ETFs can easily make up all of an investor’s portfolio, those seeking to further defer their tax bill now can use one or a few unique ETFs to accomplish this—that is, if they remain legal. The IRS is looking at the legality of some of these structures, but for now, and for the right person, a few offer compelling ways to improve aftertax outcomes. They build on the idea that broad-based index ETFs are hard to beat. Instead, they attempt to deliver reliable value to clients by reducing or deferring taxes and improving aftertax returns. Box-spread ETFs and ETFs seeded with Section 351 conversions are two examples. New ETFs Are Launching Fast. Proceed With CautionThat brings us to a fork in the road. Are recent innovations flashes in the pan or durable trends? It’s never been more important for investors and advisors to be picky. ETFs are only getting more complex, so allocating to the wrong third-generation ETF could have consequences. For most, sticking with proven strategies is perfectly fine.