This year marks the 30-year anniversary for the first U.S. exchange-traded fund launch. Despite early skepticism, both investors and financial advisors have embraced ETFs. With more than 3,000 funds and around $7 trillion in assets under management, how can the ETF industry continue its momentum? And what comes next?
Let’s examine three trends that are worth monitoring.
Conversions To The ETF Structure
The past few years have been bleak for actively managed mutual funds. From July 2015 to December 2022, almost $2 trillion has exited U.S. active funds, according to Morningstar. By comparison, ETFs have been flooded with consistent inflows. Is it any wonder asset managers want in on the ETF business?
The conversions of mutual funds into ETFs have meanwhile created an explosion of new launch activity.
“Thirty-eight funds have so far converted from their mutual fund structure right into an ETF with $63 billion in initial cash flow,” said Douglas Yones, head of ETFs at the New York Stock Exchange. “The pipeline of funds set to convert has never been stronger.”
If an active manager wants to enter the exchange-traded fund market, one way is to offer an ETF clone of an existing mutual fund strategy with a good track record. Firms like JPMorgan and Avantis have experienced early success with their active ETF launches, which offers promise for firms looking to enter the ETF space.
Getting Into The Retirement Plan Game
In the early days of their development, ETFs were accused of being mere short-term trading vehicles unworthy of serious consideration by long-term investors. Today, that’s an antiquated view of a bygone era. And many advisors are now using long-term investing strategies with the help of model ETF portfolios, along with collective trusts that hold entire portfolios of ETFs.
Up until now, ETFs have been a no-show in the retirement plan market, which has been dominated by mutual funds. But shrewd ETF firms see the 401(k) market as ripe for disruption—a business opportunity that’s too lucrative for them to pass up. As of September 2022, there was $6.3 trillion inside 401(k) plans, according to the Investment Company Institute; there were 625,000 plans serving about 60 million active participants and millions of former employees and retirees.
If ETF firms could get into the 401(k) market, they’d feel less pressure to attract assets by launching more and more products. Instead, they’d be able to rely on a steady flow of plan inflows.
Some of the largest ETF firms (such as Blackrock, Invesco and Vanguard) serve 401(k) investors with mutual funds while simultaneously offering ETFs to other investors. It’s unlikely these firms would make a unilateral move to cannibalize their prized 401(k) businesses with an all-ETF offering. However, firms with no significant presence in the 401(k) market could make a big move to shake things up by offering ETFs only.
Spot-Priced Cryptocurrency Products
Despite getting clobbered by falling prices, scandals and fresh regulation, the cryptocurrency market shows promise.
The global crypto market was valued at $4.67 billion last year, according to Grand View Research. That’s up from just $1.49 billion in 2020. And from 2023 to 2027, revenue is expected to show a compound annual growth rate of 14.36%—to reach a projected total of $73 billion, according to data from Statista.
And yet the ETF market still lacks products that track major cryptocurrencies such as bitcoin and ethereum in real time.
Last year, the Securities and Exchange Commission rejected applications from Grayscale, VanEck and WisdomTree for spot bitcoin ETFs. The industry has become so frustrated with regulators’ bias against cryptos that firms like Grayscale have resorted to suing the agency.
Looking ahead, spot-priced crypto-linked ETFs would be a major breakthrough. With billions, maybe even trillions of dollars at stake, it will happen. Stay tuned!