What’s Next for ETFs? 3 ETF Trends Taking the Industry by Storm
ETFs represent roughly 12% of investable assets, up from 9% at the end of 2022.1 We believe wider adoption, new use cases, and more innovative products will continue to drive growth.
Since State Street Global Advisors launched the first US-listed ETF more than 30 years ago, the global ETF market has expanded across demographics, strategies, asset classes, and everything in between. ETFs have gathered assets at an impressive cumulative annualized growth rate of 19.8% since 2008, reaching US$11.1 trillion assets under management (AUM) at the end of 2023.2
And there’s no sign of this exponential growth slowing down. Among US investors in our 2024 ETF Impact Survey, 63% plan to buy ETFs in the next 12 months, up from 37% in Q4 2022; Australian investor interest has doubled in the same time frame, from 36% to 72%.3
So, what’s next for ETFs — in 2024 and beyond? Here are three trends we’re watching:
1. Active ETFs Take Center Stage
Led by the US and Canada, active ETFs took in US$93 Billion, (almost a third of all global ETF inflows) in the first four months of 2024 and are on pace to exceed last year’s record haul.4 Remarkably, global active fixed income ETFs have been responsible for almost half of total inflows into intermediate-core and intermediate-core-plus bond ETFs so far this year (US$7.6 billion, 42%).5
While the search for excess returns is a hallmark of active management, investors also choose active ETFs to:
- Pursue specific outcomes in a transparent, liquid, and tax efficient manner.
- Potentially mitigate risks and capitalize on opportunities passive strategies might miss.
“Right now, global ETF AUM is US$11 trillion, and global mutual fund AUM is US$33 trillion. Given the growth trends, the increase in active strategies, and the increasing number of use cases, I think global ETF assets will surpass global mutual fund assets in 10 years, or by 2034.”
Active fixed income and alternative ETFs should continue to capture inflows as more investors make strategic allocations for diversification purposes and more issuers launch products, including by way of mutual fund conversions. In the US, for example, almost one in four managers plans to convert at least one mutual fund into a transparent active ETF.6
2. Fixed Income ETFs: New Challenges (and Opportunities) Emerge
Higher interest rates put the income back in fixed income in 2023. The near-term opportunity to capture yield, considering excess cash sitting on the sidelines, was a tailwind for fixed income ETFs.
In response to rate volatility, investors also deposited nearly US$1 trillion globally in money market funds over the past year.7 But now, many of the world’s central banks are expected to shift from holding to cutting interest rates. That means investors in cash-like accounts will face new challenges, like reinvestment risk.
Given investors’ need to balance income and stability in a volatile rate environment, we expect to see increased inflows into active core bond ETFs, as well as into a mix of short and intermediate investment-grade bond ETFs.
“To extrapolate a trend in the US from the first four months of 2024, where more than 40% of US fixed income ETF inflows were into active funds,8 I expect value-added active bond ETFs will continue to garner major market share.”
3. AI Opportunities Abound: Investing Holistically
Artificial Intelligence (AI) might as well stand for “all in” because investors are flocking to it in droves. Thematic Robotic and AI ETFs in the US have had nearly US$3 billion of inflows over the past 12 months.9 Smart Cities, another thematic ETF sub-industry, has received outsized interest over the past year, taking in US$400 million so far in 2024, increasing assets in this market by more than 20%.10
“As AI technology becomes easier to adopt, broader AI applications across a wide range of sectors — social media and entertainment, life science research, health care, and financial services — will present significant value-creation opportunities.”
Meanwhile, traditional technology ETFs across the globe have had over US$18 billion in inflows during the same time frame.11 Those flows are into Technology sector ETFs, as well as specific industries supporting AI development, such as semiconductors.
Naturally, rapid and steep growth attracts skepticism. Some observers have raised alarms about bubble-like valuations. But current valuations are supported by robust fundamentals, lower debt levels, and positive cash flows — suggesting a sustainable trajectory.
Owning a diversified basket of stocks connected to the AI revolution may help investors reduce idiosyncratic risks, such as valuations or lofty growth expectations missing the target. And, it may help reduce the possibility of getting the theme right but the single stock call wrong — the foundational case for sector investing.
Rather than identifying “pure” AI companies or investment exposures, investors may benefit from adopting a more holistic view, focusing on industries and sectors that are broadly investing in AI for business growth.
What’s Next for the Global ETF Market?
To learn what other trends we're watching and to explore our top predictions for the future, download our ETF Impact Report 2024-2025: The Next Wave of Innovation.