ETFs are now the mainstream investment vehicle for hundreds of thousands of advisors, institutions and individuals, having amassed almost $11 trillion in assets over the last three decades. But ETF industry participants expect that the next $10 trillion in assets will look quite different from the explosion in passive index funds that dominated the early stages of the business.

At a press event sponsored by State Street Global Advisors in New York City last week, several experts said they expected conversions of existing mutual funds and active management investment vehicles to play a much bigger role in new product launches over the next decade. Rarely a week goes by without an asset management company announcing a mutual fund conversion and many fund complexes that haven’t announced them are currently laying the groundwork to do so.

As the recent debut of Bitcoin ETFs revealed, the industry has displayed an ability to evolve and package different investment instruments into ETF wrappers. A few decades ago, it was a “hard job to get [investments like] emerging market debt into an ETF,” Ana Paglia, chief business officer at SSGA, said.

Indeed, with the growth in secondary markets for assets like private equity, some observers think it is only a matter of time before investors can purchase these assets in an ETF..

The 2024 ETF Impact Survey conducted by SSGA released today found that financial advisors and institutional investors have led the way with ETF adoption, with 70% of advisors saying they “always” or “often”  recommend ETFs. Among individuals, that figure was 45%, up from 40% in State Street’s last survey in 2022.

Scott Chronert, head of U.S. equity strategy at Citigroup and a participant at last week’s press event, sees the next leg of ETF growth moving from “passive revolution to active evolution.” Asset managers are looking at ETFs for two reasons—offensive and defensive, he said.

“Some view the ETF wrapper as a means of getting attention in a pretty dense marketplace,” Chronert explained. ETFs continue to take market share from mutual funds and asset managers are realizing that the new vehicle provides a better growth avenue than the 100-year old mutual fund model, he said.

Demographics also are likely to drive the migration from mutual funds to ETFs, he said. Baby boomers grew with mutual funds, Chronert said, but over the next two decades most of those assets will get transferred to younger generations that are more comfortable with ETFs. Also, the growth of model portfolios, most of which favor ETFs, in recent years is likely to accelerate adoption.

The survey found 58% of millennials report owning ETFs, compared to 47% of GenXers and 37% of baby boomers. The top reason these individual investors cite for investing in them is Diversification (49%), access to certain asset classes (47%) and lower costs (37%).

State Street’s Paglia noted that ETFs also “100% aligned with the way” the next generation invests. Over the next decade, a major challenge for asset managers will be to develop solutions for how these emerging asset accumulators invest, she said. “Millennials will use advisors” but they will want a say in how their money invested, she added.

Paglia also pointed out there was room for more education, particularly among non-ETF investors. Among this group, 71% said they found ETFs' tax efficiency was difficult to understand versus 48% among ETF investors.

Michael Arone, chief investment strategist for SSGA’s SPDR business, expects to see ETFs play a role in the resurgence of active management. He said the passive investing movement received a big boost from the economic environment that existed in the post-global-financial-crisis world of the previous decade, when the Federal Reserve tried to engineer growth though loose monetary policy.

While the Fed was mostly unsuccessful in its efforts to jumpstart the economy, it triggered a surge in equity indexes and index-based ETFs, he said. Arone nows sees the post-pandemic world transitioning to a different universe characterized by higher interest rates and inflation. “We’re entering a new decade with a fresh opportunity for active [management],” he said.