How to Avoid the Worst Sector ETFs 2Q26

Why It Matters

Avoiding low‑liquidity, high‑fee, and poorly‑held ETFs protects investors from hidden costs and underperformance, reinforcing prudent portfolio construction in a crowded market.

Key Takeaways

• Skip ETFs with assets under $100 million to ensure liquidity
• Target total annual costs below 0.46% (average sector fee)
• Prioritize ETFs with strong holdings; quality outweighs low fees
• State Street ETFs frequently rank among worst holdings
• Use automated analytics to assess ETF portfolios at scale

Pulse Analysis

The explosion of sector exchange‑traded funds has given investors unprecedented choice, but it also creates a minefield of products that may not serve their best interests. While issuers profit from launching new funds, many of these ETFs suffer from thin trading volumes and modest asset bases, leading to wide bid‑ask spreads and price dislocations. For a typical U.S. investor, the liquidity threshold of $100 million AUM serves as a practical filter, ensuring that the fund can be bought or sold without excessive slippage.

Cost efficiency remains a cornerstone of passive investing, yet not all ETFs live up to the low‑fee promise. New Constructs’ analysis shows the average total annual cost for the 403 U.S. sector ETFs sits at 0.46%, with the weighted‑average of those reporting AUM at just 0.14%. By targeting funds below the sector average—or better yet, those approaching the weighted‑average fee—investors can preserve more of their returns. However, fee discipline alone is insufficient; the quality of underlying holdings drives performance. The firm’s rating system flags several State Street offerings as consistently poor, underscoring that a cheap fund with weak stocks can underperform even the most inexpensive alternatives.

To navigate this complexity, New Constructs leverages its Robo‑Analyst platform, which automates deep‑dive analysis of each ETF’s constituent securities. This technology scales the due‑diligence process, allowing advisors and fiduciaries to meet their duty of care without prohibitive labor costs. As the industry increasingly adopts AI‑driven research, investors can expect more transparent, data‑rich evaluations that align cost, liquidity, and holdings quality—key pillars for building resilient, long‑term portfolios.