ETFs Have Dominated for Decades. What’s Next?

ETFs are like Pringles: Once you pop, you just can’t stop.

Exchange-traded funds have been steadily chipping away at the market share of the almighty mutual fund, and after roughly 30 years, now make up almost 30% of total invested assets in the US. The latest product developments, like new share classes and crypto funds, are adding to the popularity and giving investors more options. It’s safe to say that in the next two decades the asset split could be closer to half, according to ETFGI founder Deborah Fuhr. 

“It’s one of these things where once you try ETFs, you tend to use them more and more,” she told The Daily Upside.

Mutual Benefits

While much of the recent success has come from active management and leveraged products, the funds are going to need to find new ways to attract clients. Thankfully, the sector isn’t short on novel ideas. The latest plan is utilizing ETF share classes that essentially open up the tax efficiencies, lower fees, and redemption mechanics of ETFs in traditional mutual funds. 

The problem? That’s not allowed under current Securities and Exchange Commission rules. Vanguard has been the sole asset manager of products with the structure for the past two decades, but its patent expired last year. Now, more than 30 firms have applied for the ability to attach ETF share classes to existing products, including Charles Schwab, State Street, and PGIM. Just last week, BlackRock became the latest to file for such an exemption. That request from the world’s largest asset manager will likely motivate the SEC to begin approving the applications, Fuhr said. 

Global A Go-Go

While the US ETF market is mature — totaling more than $9 trillion in net assets — other markets in South America, Asia, Africa, and Australia are just getting started. Some developing nations are skipping mutual funds altogether, and moving straight to ETFs — like how some countries adopted cell phones before building out landline networks — according to an expert at a recent ETFGI summit in New York. 

“If one is bullish on ETFs in North America, you should be even more bullish everywhere else,” he said at the event, which requests anonymity so participants can discuss sensitive industry issues.

Slowly But Surely: Some may argue 30-plus years is a long time to only capture roughly a third of total invested assets. But another expert at the event likened the process to his father still taping Detroit Tigers games despite VHS being out of date tech. “We underestimate how long disruption takes,” he said.