Exchange traded funds are coming off another banner year of inflows. In 2024, US-listed exchange traded products tacked another $1.1 trillion in assets – a staggering sum under any circumstance, let alone when considering it represented an 89% increase over 2023’s inflows figure.
Just how exponential ETF growth will be this year remains to be seen, but growth of some form is all but guaranteed. Consider the findings in Brown Brothers Harriman’s 12th annual Global ETF Investor Survey, which indicates 95% of polled investors will boost allocations to ETFs in 2025, up from the impressive 83% seen in the 2024 survey. Importantly, near two-thirds of those polled by BBH said ETFs are their preferred options for putting on fresh exposures.
That’s likely due to the transparency and tradability of ETFs, the tax advantages associated with these products, democratization of asset classes, low fees or some combination of all four of those traits. And with it being 2025, advisors and fund industry observers alike should expect that it won’t just be pure beta ETFs leading the growth wave. Rather, it will be actively managed ETFs and unique products, such as cryptocurrency fare, that drive more capital to ETFs in 2025.
Speaking of Actively Managed ETFs…
Yes, actively managed mutual funds and ETFs are still rivals, but many issuers of the former have woken up to the fact that competing with the former probably isn’t their best interest. Said another way, advisors and still investors want active exposures, but they want them in the ETF wrapper.
That sentiment has breathed new life into active management and the fund industry is responding, by introducing more actively managed ETFs, some of which trace their lineage back to popular active mutual funds that were impressive asset gatherers in their own rights. Data confirm market participants will extend their embrace of active ETFs this year.
“Additionally, nearly 30% of investors plan to re-allocate from both actively-managed and index-based mutual funds to ETFs, while 33% plan to shift their passive allocation (mutual funds and ETFs) to active ETFs over the next 12 months, underscoring continuing market trends,” according to BBH.
The survey says a quarter of market participants like active ETFs because the products allow them to tap institutional-level strategies while 20% said they enjoy the transparency offered by active ETFs relative to mutual funds. Tax efficiencies were also among the reasons mentioned for the broader embrace of active ETFs. Perhaps surprisingly, some respondents to the BBH survey said they’ll reduce exposure to passive ETFs to boost bets on active funds.
“While investors are buying more active ETFs, our survey suggests they are simultaneously reducing their exposures to other products, with over half our respondents (53%) planning to sell index-based ETFs as they dive deeper into active ETFs,” notes the research firm.
Some Things Change, Others Stay the Same
In the U.S., the ETF industry is just over three decades old, which is still youthful in financial services terms. That implies ample room for issuers and investors to change with the times and there’s evidence that’s occurring.
While ETFs’ reputation for low fees has undoubtedly a significant, vital growth driver for the industry, asset allocators are placing less emphasis on “cheap.”
“In the US, expense ratio finished last in relative importance across all of the ETF attributes we compared, implying that investors recognize the holistic benefits that ETFs can deliver beyond lower costs,” says BBH. “Additionally, only 12% of global respondents invest in active ETFs due to lower costs when compared with their mutual fund counterparts, citing access to institutional managers or strategies as their top motivation.”
What’s not changing, at least not yet, is investors’ herd mentality as it pertains to ETF. Said another way, many investors find comfort in knowing that someone else is involved with a particular ETF before they themselves take the plunge. That’s been the case since the birth of the first ETF.
“In the US, expense ratio finished last in relative importance across all of the ETF attributes we compared, implying that investors recognize the holistic benefits that ETFs can deliver beyond lower costs. Additionally, only 12% of global respondents invest in active ETFs due to lower costs when compared with their mutual fund counterparts, citing access to institutional managers or strategies as their top motivation,” concludes BBH.