The evolution of exchange-traded funds

Key takeaways:

• As investors seek tax efficiency, transparency, and lower costs,¹ ETFs have increasingly become a popular vehicle.
• ETFs appeal to a wide range of investors, from institutions and hedge funds to individual investors and financial professionals.
• ETFs are no longer just simple index funds—they have become an essential part of modern investing, offering solutions for nearly every strategy, including digital assets.

Exchange-traded funds (ETFs) have revolutionized investing by offering a blend of flexibility, tax efficiency, and other features. Launched in the U.S. in 1993, ETFs originally tracked major stock indexes, giving investors access to broad markets with the ease of trading individual stocks.

More than 30 years later, ETFs remain one of the fastest-growing segments of the investment landscape. Despite their maturity, the industry continues to expand at a record pace—and recent trends suggest that growth could even accelerate in the years ahead.

The compound annual growth rate (CAGR) measures an investment's annual growth rate over a period of time.

Consider this: 2024 was a landmark year for ETFs as they attracted over $1 trillion in inflows, nearly doubling the previous year’s total and surpassing the prior record of $900 billion set in 2021.² That translates to roughly $4 billion per day flowing into U.S. ETFs in 2024.³

Why ETFs have become so popular

Investors can today choose from more than 3,900 ETFs in the U.S., which collectively have more than $10 trillion of assets under management.⁴ The rapid rise of ETFs isn’t just about innovation—it’s about the potential benefits of their structure, including:

• Tax efficiency: Unlike mutual funds, which may trigger capital gains distributions, ETFs use an “in-kind” creation/redemption process that can help limit tax exposure.⁵
• Intraday trading: ETFs trade throughout the day like stocks, allowing investors to enter or exit positions at market prices.
• Transparency: Most ETFs disclose their holdings daily, giving investors a clear picture of their exposure.

As a result, ETFs appeal to a wide range of investors, from institutions and hedge funds to individual investors and financial professionals.

ETFs are expanding in new directions

While ETFs started as passive, index-tracking funds, the industry has evolved far beyond that initial concept in areas such as:

Active management: The first ETFs like Invesco QQQ tracked indexes like the Nasdaq-100, but today, actively managed ETFs are gaining momentum. Many traditional mutual fund managers are converting their funds to ETFs, leveraging the ETF structure’s tax efficiency and liquidity.

Bitcoin and digital assets: Another major trend is the rise of Bitcoin and digital asset ETFs. Regulatory approvals have opened the door for crypto-based Exchange Traded Products (ETPs), allowing investors to gain exposure to Bitcoin and other digital assets without needing a separate crypto wallet. These funds are off to a strong start, gathering billions in assets as a more convenient way to invest in the world’s most recognized cryptocurrency.⁶

Private markets: In another step forward, ETFs are now expanding into private assets, such as private credit and private equity. Historically, these markets were accessible only to institutions and ultra-high-net-worth investors. ETFs are changing that, providing more investors with exposure to alternative investments that were once out of reach.

Options-based ETF strategies: Some ETFs cater specifically to short-term traders, including leveraged ETFs that aim to amplify daily market movements and inverse ETFs designed to profit from declines in asset prices, or even individual stocks. There are also options-based ETFs designed to enhance income and reduce volatility designed for long-term investors.

The natural evolution of the ETF market

The ETF landscape isn’t just expanding—it’s evolving, and investors are playing a major role in shaping what comes next.

Regulatory shifts in recent years have made it easier for asset managers to launch new ETFs, fueling a wave of innovation. In 2024 alone, 744 ETFs were introduced in the U.S., while 196 ETFs closed.⁷ It’s normal to expect consolidation in a maturing market, and investors will decide which ETFs are the most useful by voting with their dollars. Indeed, innovation and competition are two of the key characteristics of the ETF industry.

ETFs are also increasing their global reach. While the U.S. remains the largest ETF market, adoption is rising in Europe, Asia, and Canada, where investors, advisors, and institutions are increasingly turning to ETFs as core building blocks of portfolios.

A part of modern investing

ETFs are no longer just simple index funds—they have become an essential part of modern investing, offering solutions for nearly every strategy, asset class, and investor type.

Whether you’re a long-term investor, a financial professional, or an active trader, ETFs provide unparalleled access, efficiency, and innovation—a trend that shows no signs of slowing down.