The Future of ETFs

Exchange-traded funds (ETFs) are growing in popularity because of their simplicity, cost-effective approach to investing, and the diversity they provide. As of June 2021, the U.S. ETF industry has grown to $3.9 trillion from $2.6 trillion pre-pandemic, aided by the 2019 rule passed by the SEC. This is good news for investors looking to expand their ETF portfolios and suggests there may be further growth ahead. But where exactly is the ETF market headed in the future and what are the trends investors should watch out for?

Key Takeaways

  • Exchange-traded funds (ETFs) have been growing in popularity due to their ease of use, the diversity they provide, and their cost-effective approach to investing.
  • The U.S. domestic ETF market has grown to almost $3.9 trillion as of mid-2021.
  • According to Dave Nadig, the chief investment officer of ETF Trends, in the next five years, ETFs are likely to surpass mutual fund assets in the United States.
  • Nadig believes high-tech platforms will lead to increased competition among asset management firms and redefine the way investors think about their overall portfolios, which will bring competition to the ETF industry.

What Is an Exchange-Traded Fund (ETF)?

An exchange-traded fund (ETF) is an investment vehicle that invests its assets in securities with the goal of tracking a benchmark, such as an index, sector, or other assets. ETFs are like mutual funds in that they provide an investor with broad access to securities. For example, an investor may invest in a technology ETF that would provide them with exposure to many technology stocks.

The standout aspect of an ETF is that it can be traded like a stock on an exchange. Investors can buy an ETF like they would buy a stock and sell it at any time, as opposed to mutual funds that have specific rules and requirements regarding selling. Also, an ETF's value is updated daily. Because ETFs are passive investments, in that they track a benchmark, they are more affordable than other investment funds, typically having low expense ratios.

Many large financial institutions have ETF product offerings. Some of the most popular are iShares, Vanguard, Schwab, ProShares, and SPDR.

Where ETFs Are Headed

“I think in the next 20 years, we’re going to see a decline in the expansion of ETFs,” says Dave Nadig, chief investment officer of ETF Trends. But Nadig is quick to point out that this isn’t likely to affect the performance of ETFs in general and that continued growth is still a likely outcome; at least in the immediate future. However, as technology continues to reshape the financial services landscape, the popularity of direct indexing platforms could change how investors view ETFs in the long term.

According to Nadig, one of the main ETF trends investors are likely to see over the next decade is continued growth. “I think the core ETF value proposition, which is extremely low-cost beta that’s transparent, tax-efficient, and easy to trade, isn’t going to go away,” he says. In fact, he believes that within the next five years, ETFs are likely to surpass mutual fund assets in the United States.

Looking further ahead, however, Nadig believes that high-tech platforms will lead to increased competition among asset management firms and redefine the way investors think about their overall portfolios. “I think that these alternative platforms, whether you call them direct indexing or not, are the future of consolidated investment management,” he says, explaining that these shifts are part of larger technological trends that are reshaping the financial landscape.

The Future of Asset Management

While these bigger changes are further ahead on the horizon, Nadig believes that they’re likely to start with smaller companies and expand out from there. “I think you’re going to see this be very disruptive initially,” he explains, emphasizing that the key players in this space are smaller financial companies who are not necessarily looking to compete with larger financial firms; at least not for the moment. “Eventually they’ll have to compete, but they have such an edge in the low-cost beta space that I think you’ll see them focus there for the foreseeable future.”

Are ETFs Long-Term or Short-Term Investments?

ETFs can be either long-term or short-term investments depending on your time horizon. As there are thousands of ETFs to choose from, you can pick one that suits your financial profile. For example, if you are looking to invest and hold for the long term, you may choose an ETF that invests primarily in blue-chip firms. If on the other hand, you are looking to make a short-term investment with the hope of quick growth, you may invest in an ETF that invests in new startups that have high growth potential for the near future.

How Many ETFs Are There Globally?

As of 2020, there are 7,602 ETFs globally. This is an increase from 276 in 2003 and 7,083 in 2019.

Will ETFs Fail?

Some ETFs do fail as they are not able to generate enough assets to fund the running of the business or the investments. However, ETFs are generally low-risk investment options and investors typically do not lose their investments when an ETF closes, as many are wound down orderly.

The Bottom Line

With ETFs currently experiencing significant growth, it seems likely that they will continue to be an attractive option for investors looking to diversify their portfolios without increasing the time and effort they need to spend on managing their assets. But with changing technologies reshaping the financial services industry, the long-term future of ETFs remains to be seen.

Article Sources
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  1. Statista. "Assets of Domestic Equity Exchange-Traded Funds in the United States from August 2014 to June 2021."

  2. Statista. "Number of Exchange Traded Funds (ETFs) Worldwide From 2003 to 2020."

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