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No matter how it’s sliced or diced and no matter what the rapidly quieting group of critics might claim, 2024 was a stellar year for the global exchange traded funds industry.
On a global basis in 2024, the ETF industry set records for inflows, assets, fund launches and institutional usage, confirming adoption is accelerating and there’s no end in sight to that trend. Advisors are big reasons why ETF adoption is surging and assets are swelling.
Among the trends that drove more ETF adoption and inflows this year were ongoing democratization of various asset classes. Collateralized loan obligations (CLOs) stand as a prime example. Today, there are approximately 10 CLO ETFs trading in the U.S., several with more than $500 million assets under management, following a time when this segment was nonexistent. That confirms ETFs worked their magic again as they did in terms of liberalizing access to gold and junk bonds, among other asset classes.
Increased democratization is an ETF theme to keep an eye on in 2025 as are some of the issues mentioned below.
Active to Loom Large, Divergences Could Close
Among the ETF themes advisors should stay abreast of next year is the potential for various divergences to narrow. Translation: some ETFs providing exposure to asset classes that rallied this year experienced outflows while others tapping into lagging segments hauled in fresh cash. Such scenarios often reverse or, at the very least, narrow.
“Banks, energy, gold and many other assets rallied sharply in 2024 but were still met with outflows, while Treasury ETFs gathered $28 billion despite 3-6% losses. Flows follow price. We expect some of these gaps to close,” notes Bank of America.
Another 2025 ETF theme expected to be prominent is the ascent of actively managed ETFs, which will be aided by the 2023 expiration of Vanguard’s share class patent protection and more moves by issuers to convert active mutual funds to the ETF wrapper. That writing is already on the wall.
“In 2024 for the first time more active ETFs launched than passive; 121 mutual funds have converted to active ETFs and, on average, reversed their prior outflows. Maybe it's really ‘ETF > MF’ rather than ‘passive > active,’” observes Bank of America.
Bigger, Older Not Always Better
Advisors know that in the ETF world, age, branding and size matter. Said another way, market participants often flock to the oldest, largest funds issued by the most familiar issuers. That’s not a guarantee of the best access or best returns, but those habits underscore the element of human behavior in the ETF market.
While those habits are hard to break, many market participants, including advisors, aren’t waiting for old guard ETFs and indexes to reflect new realities. That is to say these investors are scouring the ETF landscape for funds that are responsive to the current investing climate and potentially what will come in the future. That’s another theme to be aware of 2025 – increased adoption of ETFs previously viewed as “quirky”, thematic or not traditional.
“Investors haven't waited for legacy providers to catch up. Instead, new ETF categories are providing greater market access and outperforming incumbent peers,” concludes Bank of America.
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