Apolipoprotein E (APOE) traffics lipids in the central nervous system. The E4 variant of APOE is a major genetic risk factor for Alzheimer's disease (AD) and a multitude of other neurodegenerative diseases, yet the molecular mechanisms by which APOE4 drives disease are still unclear. A growing collection of studies in iPSC models, knock-in mice, and human postmortem brain tissue have demonstrated that APOE4 expression in astrocytes and microglia is associated with the accumulation of cytoplasmic lipid droplets, defects in endolysosomal trafficking, impaired mitochondrial metabolism, upregulation of innate immune pathways, and a transition into a reactive state. In this review, we collate these developments and suggest testable mechanistic hypotheses that could explain common APOE4 phenotypes.