The evolution of exchange-traded funds

In the three decades since their introduction, exchange-traded funds (ETFs) have become one of the “go to” investment vehicles for many institutions, financial professionals, and individuals alike. Originally created in response to the rising popularity of passive index investing strategies, ETFs were designed to offer a less costly, more liquid and simpler alternative to mutual funds for investors seeking to closely track a particular index’s performance.

The seed of that idea has blossomed into over 3,000 ETFs in the U.S. today covering almost every aspect of the market—from stocks and bonds, to specific sectors, foreign exchanges, and even bitcoin and digital assets. U.S.-listed ETFs ended 2023 with over $8 trillion in assets, which rose 25% for the year.¹

Through it all, the Invesco QQQ ETF (which tracks the Nasdaq-100 Index) has served as a major driver of growth and popularity for the ETF industry:

• One of only four U.S.-listed ETFs with assets in excess of $200 billion²
• The 2nd most actively traded U.S. listed ETF³
• Ranked in the top 1% best-performing large-cap growth funds (347 in category) over the past 15 years by Lipper as of February 29, 2024
  
  Lipper fund percentile rankings are based on total returns, excluding sales charges and including fees and expenses, and are versus mutual funds, ETFs and funds of funds in the category tracked by Lipper. Source: The Lipper one-year rank 22% (145 of 675), five-year rank 1% (4 of 595), 10-year rank 1% (2 of 466), 15-year rank 1% (1 of 347) as of February 29, 2024.

The universe of ETF offerings continues to expand. For example, the first ETFs designed to provide exposure to spot bitcoin prices recently launched, potentially paving the way for more ETFs that invest in digital assets.

Actively managed ETFs are another potential growth area. Assets in actively managed ETFs grew 37% in 2023.⁴ While most ETF assets still reside in passive ETFs, the growing adoption of actively managed strategies reinforces that investors value the transparency, tax efficiency, and liquidity of ETFs.

Bottom line: Even though ETFs have come a long way already, their best days may still be ahead. Among U.S. asset managers, 74% believe ETFs are a large opportunity.⁵ Meanwhile, ETFs ranked third among the top 10 investment products to grow in popularity with U.S. households since 2020.⁶ We think the future could be bright for ETFs.