ETFs Reshape Global Markets

Exchange-traded funds (ETFs) are reshaping global markets with record-breaking growth. In 2024, the ETF industry reached $15 trillion in assets, experienced $1.6 trillion in inflows, and launched 1,485 new funds, according to a Bank of America note.

Benefits of ETFs

ETFs now offer investors liquidity, tax efficiency, and market access. Their impact is evident across trends reshaping the investment landscape:

• Narrowing Divergences: Asset performance and ETF flows are converging. Treasury ETFs attracted $28 billion despite losses, while outflows affected sectors like energy and gold.
• Flow Dynamics: Flows typically follow returns. Analysts expect positioning gaps to close as the market transitions from a 2% world to a 5% world.

Active ETFs Outpace Passive Launches

In 2024, active ETFs overtook passive launches for the first time, with over 120 mutual funds converting to ETFs, reversing previous outflows. An analyst noted, “Maybe it’s really ETF > MF rather than passive > active.”

Emerging Opportunities

ETFs are making illiquid assets, such as collateralized loan obligations (CLOs), accessible, with assets under management (AUM) in these funds surging 245% last year. Customized ETFs are also outperforming traditional indexes, with sector-specific funds, particularly in industrials and defense, leading the charge.

International Growth

Non-U.S. ETFs attracted $583 billion, accounting for 38% of total inflows. There are now 2.1 funds domiciled abroad for every U.S.-listed ETF.

Sophistication and Evolution

ETFs have become more sophisticated, utilizing AI and investing in derivatives and cryptocurrencies, further expanding their reach.

Launched in 1993, SPY remains the largest ETF, but rivals like VOO are gaining ground. With a lower expense ratio, VOO could surpass SPY by 2026.

As ETFs redefine investing, their influence shows no signs of slowing in 2025.