In the past year, the trend towards ETFs accelerated, with ETF net flows exceeding $1 trillion annually for the first time ever and total U.S. ETF assets eclipsing $10 trillion. 2024 also marked several key milestones in the ETF landscape. Asset management firms continued to push into the ETF space with many active management firms launching products. Traditional active, income- focused, buffer, and single-stock ETFs drew increased attention. We also witnessed the launch and rise of Bitcoin and Crypto ETFs which were in some ways 10 years in the making. Institutional and financial advisor adoption rose during the year with firm gatekeepers, research analysts, and investment consultants, adding active ETFs to their approved lists, implementing allocations within model portfolios, and outlining due diligence processes for active ETFs.
ETF flows
2024 was a record year for ETF flows, with $1.12 trillion flowing into U.S.-listed ETFs. This compares with the previous record inflows of $911 billion in 2021. Equity market strength certainly helped contribute to the momentum driving the record setting flows, with the S&P 500 Index up 25% in 2024, and capping off its best back-to-back years since 1998. 2024 was also the first year that one ETF took in more than $100 billion in a single year, with the Vanguard S&P 500 ETF (VOO) recording $113 billion in inflows. While U.S. listed ETF assets exceeded $10 trillion, global ETF assets reached the $15 trillion mark. The team at Bloomberg Intelligence highlights that global ETF assets grew 32% in 2024 and will likely hit $35 trillion by the year 2035.
Active ETF launches, institutional adoption
In the past, the ETF world’s battle of active versus passive was more one-sided as passive products widely dominated the market. However, that has shifted a bit in the past few years with active strategies bringing new competition to the still mostly passive ETF world. Active ETF growth continued to surge in 2024 with fund launches, new firms entering the space, and proportionally outsized flows towards active. Since 2019 and the ETF Rule, 6c-11, which permits custom baskets, active ETFs have seen a steady increase in collective AUM each year. More than 500 new active ETFs were launched last year. While active ETFs still only comprise roughly 10% of total ETF assets, a level that has been climbing each year, they took in more than 25% (or $290 billion) of flows in 2024. Five firms comprised roughly 50% of the total active ETF flows, including JP Morgan, Dimensional, Capital Group, Fidelity, and iShares. MFS, Oakmark, and Allspring were three notable firms launching their first active ETFs in 2024.
With more active ETFs than ever to choose from and following increased retail and advisor demand, institutional investment firms have tailored their due diligence framework to fit the ETF structure. The ETF’s expense ratios, liquidity, spreads, trade volume, tax efficiency, operational structure, and capital markets support are all additional areas of focus when evaluating ETFs. The move out of mutual funds and to ETFs has continued, with financial advisors and model providers playing a large part of this shift. In 2024, model portfolio managers utilized active ETFs more in their portfolio construction, helping to deliver a streamlined portfolio cost structure to advisors and their clients.
Bitcoin, high-income, buffer, and single stock ETF launches
In January 2024, spot Bitcoin ETFs burst into the ETF world following the SEC approval order, marking the widest and most heavily followed debut of an asset class. There were 11 firms with spot Bitcoin ETFs ready to begin trading the day after the approval order. What followed exceeded most expectations, with the spot Bitcoin ETFs setting many records along way, including the fastest ETF to reach $50 billion in assets. The crypto ETF asset class took in more than $100 billion during 2024. The surge in ETF crypto assets was also a key factor driving Bitcoin’s price above $100,000 in December 2024.
Several ETF product categories experienced increased growth in 2024, including high-income, buffer, and single stock ETFs. High income ETFs generally use options to produce increased income distributions. Buffer ETFs offer downside protection but with limited upside. Single stocks ETFs typically seek to provide two or three times the upside or downside of an individual stock or small group of stocks’ daily performance. These moves often come with exceedingly high volatility and potential for large wins or losses. While these ETFs, along with crypto ETFs, each come with increased risk and may be better suited as trading vehicles or for short-term investors, one should not overlook the success they can have when the market trends in their direction.
Potential for ETF share class
In 2025, a large focus will be on if the SEC approves the creation of ETFs as a share class for mutual funds. With trillions locked in the mutual fund structure and consistent mutual fund outflows, asset managers are looking to stem the outflows. There are more than 30 asset managers that have put in requests for approval since Vanguard’s patent on the ETF share class usage expired in May 2023. Approval would likely lead to a massive launch of new ETFs as money managers seek out ways to keep assets within their fund structure and utilize the benefits of the ETF vehicle.
Outlook for ETFs in 2025
We expect the ETF boom, including active ETFs and ETF model portfolios, to continue in 2025. The active ETF space will experience increased competition and growth as more traditional active management strategies enter. Fixed income ETFs will likely see increased demand amid a shifting rate environment and search for increased yield as inflation and monetary policy will be key areas of focus in the year ahead. Private asset ETFs are another area that should see higher growth, as firms look to offer private equity, private credit, and other alternative investments within the ETF structure. When Bitcoin and other cryptocurrencies spike in attention, investors will increasingly turn to the ETFs that track their price movements. As the last few years have proven, ETF growth is not slowing down, and the success from 2024 has pushed the bar further ahead.
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