The exchange-traded funds (ETF) market has experienced significant expansion, especially with the growing prominence of active ETFs catering to investors’ evolving needs. As this market continues to develop, active ETFs and alternative investment exposures are emerging as key components, attracting substantial investor interest and reshaping the ETF landscape. This article delves into critical trends, noteworthy findings, and strategic initiatives influencing the ETF market, offering insights into its current state and future direction.
The Rise of Active ETFs
Increasing Popularity and Development
Active ETFs have rapidly gained traction in the ETF market, driven primarily by the fee compression seen in passive ETFs and the growing acceptance of active strategies among investors. According to Cerulli Associates, a prominent fund data provider, an astounding 91% of ETF issuers are either developing or planning to develop transparent active ETF products, in contrast to only 26% focusing on passive ETFs. This remarkable shift reflects the increasing demand for active management within the ETF framework, signaling a departure from the dominance of passive strategies that have characterized the market for years.
The proliferation of active ETFs is further underscored by the various advantages they offer over traditional actively managed mutual funds, including lower costs, tax efficiency, and ease of trading. These benefits appeal to both retail and institutional investors, driving their adoption. As a result, more fund managers are embracing the ETF structure to offer their active management expertise, aligning with investor preferences for transparent and efficiently managed investment vehicles. The growing popularity of active ETFs marks an evolution in investor behavior, with a clear trend toward sophisticated, actively managed investment options within the ETF market.
Record-Breaking Growth and Net Inflows
In a significant milestone for the ETF industry, ETF assets under management (AUM) surpassed the $10 trillion mark for the first time in November 2024, accompanied by a record-breaking monthly flow of $156 billion. Active ETFs played a pivotal role in this growth, seeing a substantial increase in net inflows throughout the year. The inflows into active ETFs nearly doubled in 2024 compared to the previous year, highlighting the rising interest in actively managed investment solutions. This momentum continued into December 2024, with notable entries into the active ETF market by prominent asset managers like Oakmark and MFS Investment Management.
MFS Investment Management, in particular, made headlines by launching its inaugural series of actively managed ETFs, featuring three equity and two fixed-income funds. This move marked a significant departure for MFS, known for launching the first mutual fund in the U.S. more than a century ago. Michael Roberge, then-chief executive and chair of MFS, emphasized that these new ETFs would provide investors with access to MFS’ investment capabilities across five popular investment categories, addressing the evolving and complex needs of today’s investors. The trend of record-breaking growth and net inflows into active ETFs underscores their increasing importance in the broader ETF market.
Strategic Initiatives by Major Asset Managers
The introduction of actively managed ETFs by well-established asset managers such as MFS Investment Management showcases the strategic initiatives being undertaken to capitalize on the growing demand for active management within the ETF structure. MFS launched a series of actively managed ETFs in December 2024, featuring three equity and two fixed-income funds, thus providing investors with diverse investment opportunities aligned with MFS’ renowned expertise. This strategic move highlights the recognition of active ETFs as essential tools for meeting the evolving needs of investors who seek both growth and income in a competitive market landscape.
Other major asset managers are also taking steps to tap into the growing market for active ETFs. These initiatives include the development of transparent active ETF products and the exploration of innovative strategies to differentiate their offerings. By leveraging their established investment processes and expertise, these asset managers aim to attract investors who seek actively managed solutions with the added benefits of the ETF structure. The increasing participation of prominent asset managers in the active ETF space underscores the strategic importance of these products in their growth strategies and the overall ETF market expansion.
Expansion of Alternative Investment Exposures
Shifting Composition of Alternative ETFs
ETFs are increasingly serving as vehicles for accessing a broader array of alternative investment exposures, including private capital. This trend reflects a notable shift in the composition of alternative category ETFs over the past few years. Whereas commodities and real estate ETFs constituted a significant 65% of alternative ETFs in 2019, this proportion decreased to about 37% by the second quarter of 2024. This transformation is attributed to the rise of ETFs offering derivative income, defined outcomes, and cryptocurrency exposures, indicating a diverse range of alternative investment strategies being packaged into ETF structures.
The changing composition of alternative ETFs signifies an evolving investor preference for more sophisticated and tailored investment solutions. Investors are increasingly drawn to alternative ETFs that provide access to non-traditional asset classes, driven by the pursuit of higher returns and diversification opportunities. This shift has prompted ETF issuers to innovate and develop products that cater to these emerging demands, expanding the scope of alternative investment options available within the ETF framework. The dynamic landscape of alternative ETFs underscores the industry’s adaptability and responsiveness to investor needs.
Remarkable Growth in Alternative ETF Assets
The growth in alternative ETF assets has been particularly striking, with total assets crossing $400 billion in net assets in November 2024. This remarkable growth rate of 93% in the first eleven months of the year was the highest among all asset classes. Such impressive expansion underscores the increasing appetite for alternative investment exposures among investors seeking to diversify their portfolios and achieve specific investment outcomes. The evolution of alternative investment offerings within the ETF structure has led to the development of more sophisticated active strategies designed to deliver predefined return profiles and greater income potential.
This surge in alternative ETF assets reflects the successful adaptation of innovative strategies that resonate with investors’ needs for tailored solutions. The structure of alternative ETFs has evolved from simple passive holdings to more complex and actively managed strategies focused on achieving specific investment goals. This adaptability has positioned alternative ETFs as attractive investment vehicles for those looking to capitalize on unique market opportunities and enhance their portfolio diversification. The ongoing growth and evolution of alternative ETF assets highlight the industry’s ability to innovate and meet the changing demands of investors.
Challenges and Opportunities
Despite the advancements and remarkable growth in alternative ETFs, several challenges remain. Around half of financial advisors refrain from utilizing alternative investment exposures, citing concerns about liquidity, heightened fees, product complexity, and cumbersome subscription and redemption processes. These challenges highlight the need for further innovation and education to address these barriers and enhance the adoption of alternative ETFs. However, despite these obstacles, ETFs present a promising entry point for financial advisors seeking to invest in true alternative assets with greater operational ease.
The opportunities within the alternative ETF space are vast, with significant potential for continued growth and innovation. As financial advisors become more familiar with the benefits of alternative ETFs and as issuers address the existing challenges, the adoption rate is likely to increase. The ability of ETFs to offer alternative investment exposures in a cost-effective and accessible manner positions them as valuable tools for portfolio diversification and risk management. The ongoing development of alternative ETFs that address liquidity concerns, reduce fees, and simplify operational processes will further enhance their appeal to both financial advisors and individual investors.
Democratizing Access to Private Markets
Innovative ETF Offerings
Major asset managers are taking proactive measures to enhance investor access to private markets through the development of innovative ETF offerings. One notable example is State Street Global Advisors (SSGA) and Apollo Global Management, who have filed to launch an actively managed ETF that invests in both public and private credit. This ETF, named the SPDR SSGA Apollo IG Public and Private Credit ETF, aims to hold private credit directly, marking a significant innovation within the ETF space. This move represents a significant step towards democratizing access to private market investments, historically limited to large institutions and ultra-high-net-worth individuals.
The SPDR SSGA Apollo IG Public and Private Credit ETF exemplifies how the ETF structure can be leveraged to provide investors with exposure to private credit markets, previously inaccessible to most retail investors. Anna Paglia, chief business officer at SSGA, emphasized the growing demand for private assets and the need to democratize access to such investments. This innovative approach aligns with the broader industry trend toward making alternative investments more accessible and transparent, catering to the increasing interest from a wider range of investors. The launch of such ETFs represents a significant advancement in the ETF market, blurring the lines between public and private markets.
Strategic Moves by BlackRock
BlackRock, a leading player in the asset management industry, has also announced initiatives to expand access to private markets through ETFs. Larry Fink, chairman and chief executive of BlackRock, expressed his vision of leading the indexing of private markets, similar to the company’s impact on public markets. In line with this vision, BlackRock acquired Preqin, a provider of private markets data, in June 2024. This strategic acquisition is seen as a critical move to drive growth and democratize private markets by enhancing the measurement, understanding, and investability of private market assets.
BlackRock’s efforts to expand access to private markets through ETFs signify a broader trend among major asset managers to innovate and offer investors diverse investment opportunities. By leveraging its expertise and the insights gained from the Preqin acquisition, BlackRock aims to develop ETFs that provide transparent and efficient access to private market investments. These strategic initiatives highlight the potential for ETFs to transform the private market landscape, offering investors new ways to diversify their portfolios and achieve their investment objectives. The ongoing advancements in this area underscore the ETF market’s adaptability and the continued pursuit of innovative solutions to meet investor demands.
Growing Adoption Among Institutional Investors
Increasing Allocations to ETFs
The growing adoption of ETFs among institutional investors is a notable trend, reflecting their recognition of the benefits and versatility of ETFs. According to The Cerulli Report—North American Institutional Markets 2024, 37% of institutions plan to increase their allocations to ETFs over the next two years. This trend is particularly pronounced among insurance general accounts, with a net 40% intending to boost ETF allocations and a net 25% planning to reduce mutual fund allocations. Institutional investors primarily use ETFs for gaining or maintaining exposures, managing cash, and liquidity, and making tactical bets, highlighting their essential role in institutional investment strategies.
The increasing allocations to ETFs by institutional investors are driven by various factors, including the need for cost-efficient investment solutions, flexibility in managing exposures, and the ability to execute tactical strategies effectively. As institutions seek to optimize their investment processes and reduce costs, ETFs provide an attractive option due to their transparency, liquidity, and ease of trading. This growing adoption among institutional investors reflects the broader recognition of ETFs as valuable tools for achieving investment objectives and managing portfolio exposures efficiently.
Transition Tools and Long-Term Holdings
The exchange-traded funds (ETF) market has witnessed considerable growth, particularly with the rise of active ETFs that cater to the evolving needs of investors. As the market continues to advance, active ETFs and alternative investment exposures are becoming pivotal, drawing substantial investor interest and reshaping the ETF landscape. This piece explores key trends, notable findings, and strategic initiatives impacting the ETF market, providing a comprehensive view of its current state and potential future direction.
In recent years, active ETFs have gained traction due to their potential to outperform traditional index-based ETFs, offering more strategic investment options. This shift aligns with investors’ growing desire for diversified portfolios that can better adapt to market conditions. Additionally, alternative investment exposures within ETFs are increasingly popular as they offer unique market opportunities and access to asset classes that were previously difficult to reach.
By understanding these trends and the strategies ETFs employ, investors can better navigate the ever-evolving ETF market, making informed decisions that align with their financial goals.