Are exchange-traded funds (ETFs) getting into dangerous territory? The industry has been growing at an impressive rate for years, and the latest assessment by some analysts suggests that the bullishness may not let up any time soon. According to Bloomberg, CEO of Deutsche Boerse AG's Stoxx Ltd. Matteo Andreetto predicts that assets in the ETF space will more than double by 2025. While this prediction rests on a high degree of confidence in ETFs as investment vehicles, there are also analysts and investors who are concerned about the downside of the space as it continues to grow. For some of these individuals, looking outside of the traditional ETF model (to, say, more actively managed funds) may be a way to ease fears. (See also: The Best ETFs of 2018: A Comprehensive Guide.)
$15 Trillion, Up to $25 Trillion
Andreetto, who leads one of Europe's largest providers of indexes, estimates that the total assets housed in global ETFs will reach $15 trillion by 2025. Some of the asset managers on his team are even more optimistic, believing that the asset pool could reach up to $25 trillion by that time. As of this writing, the global ETF industry manages about $6.8 trillion. Andreetto explained that "we've seen a significant shift from active to passive over the past few years," adding that "every single layer of benchmarking is growing because of the inefficiencies of active managers."
In making this prediction, Andreetto has positioned himself as one of the more bullish ETF forecasters, but he is not alone. BlackRock, Inc. (BLK) has suggested that half of all U.S. investors will participate in the ETF market by 2020, while State Street Global Advisors' Jim Ross predicts ETF assets climbing to $25 trillion across the globe by the end of 2025.
This year, U.S. investors have added $181 billion into passive ETFs. While this figure is massive, it is less than half of the figure for the same time last year; by the end of June in 2017, investors had placed $389 billion in these vehicles since the start of the year. (For more, watch the video: An Introduction to Exchange-Traded Funds.)
Return to Active Strategies?
While forecasters like Andreetto are broadly optimistic about passive ETFs looking ahead, others are more cautious. Some analysts have pointed to what they see as cracks in the U.S. equity bull market as a sign that investors may flee passive strategies in favor of more active ones in the years to come. Furthermore, investors are not pouring assets into ETFs without thinking; in February, the largest ETF in the world, State Street's SPDR S&P 500 ETF (SPY), saw record outflows as volatility levels spiked. In a single week, the outflows did away with nine consecutive weeks of accumulations. (See also: Top 3 ETFs for Long-Term Investors.)
Nonetheless, despite words of caution about passive ETFs coming from select corners of the investment world, investors as a broad group have overwhelmingly chosen passive over active strategies. Indeed, only about $3 billion has been poured into active funds so far this year, just a small fraction of the assets dedicated to passive ETFs. As SPY's outflows from February suggest, however, it's possible that the trend toward passive products could change fairly abruptly. If investors grow too concerned about the stability of these funds relative to the broader market, for instance, the situation might adjust quickly.
For the time being, passive ETFs remain dominant. Andreetto pointed in particular to ETFs tracking thematic and factor-investing strategies as those that have seen the highest growth rates in the recent past. It can be difficult to determine which ETFs are the fastest growing, though, as the industry as a whole continues to swell at a dramatic pace, both in terms of total assets and with regard to the number of ETFs available. (For additional reading, check out: ETF Growth Spurt Will Continue.)