Four Forces Shaping The ETF Future

Investor use of ETFs is growing with extraordinary speed. They represent roughly 12 percent of investable assets, up from 9 percent at the end of 2022¹. This is just the start: wider adoption, new use cases, and more innovative products will continue to drive growth.

So, what’s next for ETFs? Here are three trends we’re watching:

1. ETFs Eclipse Mutual Funds 

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 percent since 2008, reaching $11.1 trillion in assets under management (AUM) at the end of 2023².

This trend will continue. As Matthew J. Bartolini, Head of SPDR Americas Research puts it: «Right now, global ETF AUM is $11 trillion, and global mutual fund AUM is $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 ten years, or by 2034.»

2. Active ETFs Take Centre Stage 

ETFs were once synonymous with passive investment. But investors committed $93 Billion – almost a third of all global ETF inflows – to active funds in the first four months of 2024, and inflows are on pace to exceed last year’s record haul.³

Investors are choosing active ETFs to deliver excess returns or to capitalize on investment opportunities that passive strategies cannot capture.

 3. Investors Bond With Fixed Income ETFs

The once vanilla-only fixed-income EFT sector is also maturing and embracing active as well as passive strategies. Higher interest rates have put the income back in fixed income in recent years, and the near-term opportunity to capture yield, considering excess cash sitting on the sidelines, has been 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. But now, as many of the world’s central banks shift from holding to cutting interest rates, 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.
Investors are warming to active ETFs here, with a surge towards active strategies.

As William Ahmuty, Head of SPDR ETF Fixed Income, puts it: «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, I expect value-added active bond ETFs will continue to garner major market share.»

3. All In For AI 

Thematic Robotic and AI ETFs in the US have seen strong inflows over the past 12 months.⁴ As well as mainstream technology sector exposure, investors are seeking our specific industries supporting AI development.
This is just the start. 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 offer opportunities.

Like any new industry, individual companies can fail to deliver on their promise. A diversified basket of stocks connected to the AI revolution may help reduce the possibility of getting the theme right but the single stock call is wrong.

Anqi Dong, CFA, CAIA, Senior Research Strategist at State Street Global Advisors outlines the scale of the opportunity: «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.» To explore our predictions for the ETF future in detail, download our ETF Impact Report.

 Source: State Street Global Advisors ETF Impact Report, unless stated otherwise.
¹ Morningstar, Bloomberg Finance, L.P., as of December 31, 2023
² Morningstar, as of December 31, 2023
³ Bloomberg Finance, L.P., State Street Global Advisors, as of April 30, 2024.
⁴ Bloomberg Finance, L.P., as of May 31, 2024.