ETF complexity increases need to scrutinize holdings

Exchange-traded funds continue to attract strong investor interest, but the growing number — and increasing complexity — of products has made due diligence more important than ever. With some ETFs using leverage or derivatives to boost income or returns, performance can diverge meaningfully from investor expectations.

BNN Bloomberg spoke with David Bahnsen, chief investment officer at The Bahnsen Group, about why investors need to understand what an ETF actually owns, the risks of popular income strategies and why dividend growth matters more than headline yield in portfolio construction.

Key Takeaways

• The rapid expansion of ETF offerings has increased the risk that investors buy products without fully understanding their objectives or underlying holdings.
• Popular income-focused ETFs can underperform simpler equity funds due to structural complexity and strategy-related tracking differences.
• Active management can play a role in navigating high equity valuations by emphasizing fundamental stock selection rather than index replication.
• Dividend strategies should focus on the sustainability and growth of payouts, not just current yield levels.
• Diversified exposure to energy infrastructure through actively managed ETFs can provide income along with the potential for long-term dividend growth.

Read the full transcript below:

ANDREW: Time for the ETF report. Our guest says as ETFs proliferate — and often become more complicated or more aggressively leveraged — it’s important for investors to understand the holdings in the fund before buying in. Let’s get more from David Bahnsen, CIO of The Bahnsen Group. David, thanks very much for joining us.

DAVID: Thanks for having me.

ANDREW: Is there a risk with such a variety — a bewildering variety — of ETFs and so many of them? I mean, there are thousands of these things. People are not always clear on what they’re holding.

DAVID: No, they’re often not clear on what they’re holding, and they’re also not clear on what the main objective of the particular ETF may be. In the simplest forms, finding passivity and basic index replication is pretty simple. Then, as you know, it gets far more complicated from there, and having some understanding of what’s under the hood is more important than ever.

ANDREW: One fantastically popular product here in Canada is covered-call ETFs, and I think you have them in the United States as well. They’re designed to improve income from a fund, but in some cases they have underperformed a straightforward ETF holding equities.

DAVID: They have. There are a lot of ETFs that have a sort of concept or theme to them, but the underlying ingredients have more complexity. You end up with what would be like a tracking error relative to performance. That has to do with the mechanics of how they go about doing these things. They’re not so simple. It’s important for investors to understand how those things work, so they can understand where there may be a delta between the underlying performance and how their own ETF performs.

ANDREW: Let’s get on to one category that you are interested in — and you do not offer one in this area — income ETFs designed to funnel dividends, for example, to the investor. You have one example that you think does a reasonable job, and it’s from USCF. This one is the USCF Midstream Energy Income Fund. Why do you think this is something investors should consider taking a look at?

DAVID: It’s interesting that, for all the ETFs we’re talking about and how wide the space is, I’m utterly shocked there isn’t more competition for active ETFs in the midstream energy space, where you can get the ability to actively manage Canadian companies, MLPs, American corporates — different categories of oil and gas and pipeline-type companies — with great income, but also growth of income, and have it be actively managed. That’s what this fund, ticker UMI, does. I think that diversification and proactive management has created some phenomenal results.

ANDREW: I’m just looking at some of the big holdings — a little dated, September 30 — but it gives us an idea. Energy Transfer LP, Enbridge, and Williams. Some of these LPs pay out income that’s more like interest rather than dividends, correct?

DAVID: No, these are largely going to be passed through to the underlying investor as qualified dividends in the United States. Some of this is, of course, sheltered. The ETF provides some tax benefit. But again, in the case of UMI, what you’re doing is avoiding a situation where it’s all American corporates without MLPs, and you’re also avoiding something that’s only MLPs. That diversification gives a little more bandwidth in the way American ETFs are set up.

ANDREW: Now, you do offer one yourself — the TBG Dividend Focus ETF. A big part of your philosophy here is don’t focus on what the yield is; focus on whether the dividend is growing.

DAVID: That’s right. What I would say is we want to buy companies where, at purchase, our blended yield across the portfolio is going to be more than double the S&P 500. But we’re buying the companies because we believe they can grow the dividend and will grow the dividend year after year, no matter what. We just don’t believe passive ETFs have done that very well. They’re subject to a lot of dividend cuts over time or very low yield. The active approach to dividend growth enables you to get in front of companies whose dividends may be vulnerable as business conditions change. That’s what we do with the TBG ETF.

ANDREW: The yield I’m seeing is about 2.5 per cent, maybe 2.6 per cent.

DAVID: That’s a little misleading, because in reality the absolute yield is about 3.7 per cent. With an ETF, investors at the ex-date are sharing all the dividends from the quarter before. TBG has had significant asset growth, so all the dividends collected are shared among more shareholders. You become a victim of your own success. That’s true of all ETFs — it’s just how they work structurally. If you take the absolute SEC yield and subtract fees, it’s in the high threes.

ANDREW: Yield is always a complicated subject. I see it’s got assets north of US$200 million, according to my Bloomberg screen. Finally, you launched it, I believe, in 2023. It has underperformed the S&P 500 since then, but of course it’s apples and oranges. The S&P has been driven by companies that pay very low or no dividends.

DAVID: That’s right. We’ve run this dividend strategy for more than 20 years. We manage about $9 billion at my firm, and we created the ETF in November 2023, so it’s a little over two years old. In 2024 and 2025, you had the AI “Magnificent Seven” trade, which did quite well. We would never benchmark this against the S&P 500. I’ll point out that in 2022, the S&P was down 19 per cent and our dividend growth strategy was up five per cent. It’s very low beta. Last year was a high-beta year. The strategy leans into energy and defensives, where there’s better dividend growth, and that growth is certainly not present in the Magnificent Seven. We’re only a few weeks into the new year, but year to date it’s outperforming the S&P by about 350 basis points.

ANDREW: You’re pretty diversified — tobacco, retail REITs, integrated oil and gas — a wide spectrum of companies. David, thank you very much for joining us.

DAVID: Thanks for having me.

ANDREW: David Bahnsen, CIO of The Bahnsen Group.

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This BNN Bloomberg summary and transcript of the Jan. 23, 2026 interview with David Bahnsen are published with the assistance of AI. Original research, interview questions and added context was created by BNN Bloomberg journalists. An editor also reviewed this material before it was published to ensure its accuracy and adherence with BNN Bloomberg editorial policies and standards.