Brendan McCann: A few themes have dominated the ETF market in 2026. Investors have piled into high-flying technology ETFs, specifically those oriented toward artificial intelligence and semiconductors. Small-cap stocks have seen a reversal in fortune and have outperformed large-cap stocks year to date.
There are countless ways to gain exposure to those trends, but investors can flock to flawed ETFs or those that lack long-term merit. The three overrated ETFs outlined here are popular with investors, but leave something to be desired.
3 Overrated ETFs
- Vanguard Russell 2000 Index Fund ETF Shares VTWO
- IShares A.I. Innovation and Tech Active ETF BAI
- Roundhill Memory ETF DRAM
The first is Vanguard Russell 2000 Index Fund ETF Shares VTWO. Aptly named, it tracks the Russell 2000 Index. It’s a popular choice in the small-blend Morningstar Category, but it has drawbacks. The Russell 2000 Index quickly comes to mind when thinking of small-cap stocks. It’s often quoted in financial news, and it is a great barometer for keeping the pulse on that slice of the market, but it’s not an ideal candidate for an index fund, and there are better options out there.
The ETF’s trading costs and lack of screens are the main issues. The Russell 2000 Index does not use turnover buffers for its smallest holdings. Those tend to be the hardest to trade in the most volatile stocks, which come with higher trading costs. The stocks cycle in and out of the portfolio, adding to the ETF’s transaction costs and cutting into returns. Some of the best small-blend peers incorporate liquidity screens, profitability screens, or focus on larger and more stable stocks. On the plus side, this ETF is cheaper than its cousin, iShares Russell 2000 ETF IWM.
The next ETF targets AI. IShares A.I. Innovation and Tech Active ETF BAI is actively managed and focuses on the most advanced companies across the AI tech stack. It’s one of the most popular technology ETFs. Portfolio manager Tony Kim brings an extensive technology background to the strategy. However, the strategy’s narrow focus on artificial intelligence makes it less durable.
The ETF holds around 40 stocks and stows about the same as the average technology fund in its top 10 holdings—roughly 50%—but the ETF is more volatile than its average peer. The team has the flexibility to invest across the globe and trade stocks that aren’t in the technology sector if they align with the AI theme. For example, the team invested in Siemens Energy ENR, which is an energy technology firm. However, the diversification benefit of those holdings is somewhat limited since companies exposed to AI can respond to the same market drivers.
Moving on to an even more concentrated AI play: Roundhill Memory ETF DRAM focuses on companies and computer memory and storage tied to the buildout of AI infrastructure. The ETF has seen massive inflows since its April 2026 inception. It’s pulled in roughly $20 billion in just three months. The ETF’s popularity may have something to do with its performance; it returned 156% from its inception through June 2026. The ETF holds a hyperconcentrated portfolio with exposure to only 12 companies as of July 13, 2026. To maintain its favorable tax status, it uses swaps to gain exposure. Swaps can circumvent diversification rules the ETF would otherwise violate if it only held the stocks of its portfolio companies.
Highly concentrated portfolios can skyrocket as this ETF has, but they can just as easily dive bomb. From the end of June through July 13, the portfolio fell 22%. Exposure to just a few companies leaves this ETF vulnerable. Three stocks took up roughly 75% of the portfolio as of July 13: Micron MU, Samsung 005930, and SK Hynix SKHY. Not to mention, the ETF’s April 1 launch date coincided with a temporary dip in price of those three stocks. The ETF’s concentrated portfolio makes it a poor choice for long-term investors. Sky-high performance is unlikely to persist, and the ETF’s fortunes could turn down quickly.
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