What Will ETFs Look Like in 2027? State Street Gazes into Its Crystal Ball

Predicting industry trends is like reading tea leaves, and experts at State Street just put on a new pot.

Assets moving into exchange-traded funds are outpacing predictions by double-digit percentages, with total flows expected to surge past $30 trillion by the end of the decade, according to a recent report from the asset manager. But the firm also made industry predictions about everything from the skyrocketing use of derivatives to which part of the world will have the fastest growth. (Spoiler: It’s the Asia-Pacific, specifically Japan.)

“Many people who follow the ETF industry believe that the next leg of growth is in geographies,” said Michael Arone, chief investment strategist at State Street Investment Management. “As more platforms are available to more investors, do-it-yourself investors … have access to more information, more accounts. This is an overlooked growth area of the ETF market.”

Crystal Ball’in It

Another overlooked aspect of the industry is the massive breadth of challenges that new products address, Arone said. “When ETFs started, the question was: ‘What index do I want to own? What market do I want to be [in]?’ Those types of things,’” he told ETF Upside. “Now, it’s a conversation about: ‘What outcome am I trying to achieve?’ and the sheer number of use cases across ETFs, whether it’s options strategies, buffer strategies or income-oriented.”

Bartolini and Arone made several long-term bets on how the industry will evolve:

• Over the next five years, a majority of ETFs will use derivatives. (Over the past five, low-volatility funds had cumulative outflows of $37 billion, while defined-outcome products had inflows of $5 billion.)
• In the next three decades, funds will morph into tokenized investment platforms trading all day, every day, globally.
• Although ETFs currently account for 14% of global investable assets, that figure could rise to 50% within the next decade.

Instantaneous Rate of Change: When it comes to derivatives, Arone said, part of their outsized growth is actually due to the appeal of income-generating products. Even though bond yields are high, a diversified portfolio of stocks and bonds might yield just a couple percentage points, which would be below the rate of inflation. As a result, many investors (particularly retirees who rely on stable finances) are turning toward derivative-oriented ETFs to generate income.

“We’re seeing real appetite from investors [for derivatives],” Arone said. “Despite the fact that bond yields are higher, in globally diversified portfolios, incomes continue to be a challenge, particularly given where inflation is.”