Industry Outlook: A Roadmap to the Next $10 Trillion in ETF Perspectives
The exchange-traded funds (ETF) industry has experienced significant growth, with U.S.-listed assets under management surpassing $10 trillion. Looking ahead, experts see a potential path for an additional $10 trillion, but acknowledge that it will require a flexible and evolving roadmap to navigate.
As of now, there are over 4,000 U.S.-listed ETFs available to investors, and it is anticipated that the rate of closures may accelerate in the near future, particularly among issuers outside of the top tier who are focusing on profitability. Five key trends are expected to unfold within the U.S. ETF industry in the coming year, as outlined in a recent Citi Research note.
Despite projections in the past underestimating the industry’s growth, the ETF market has exceeded expectations, with AUM now surpassing $10 trillion. Factors contributing to this growth include the industry’s ability to adapt to changing market conditions, introduce innovative new products, and attract investors with various use cases and strategies.
Looking forward, experts foresee the potential for another $10 trillion in AUM by the end of the decade, with the industry nearly tripling in size by 2035. This growth will be driven by ongoing market gains, the transition from mutual funds to ETFs, and an increase in the availability of different asset classes and investment strategies within ETF products.
A closer look at the ETF product landscape reveals that although there are now more than 4,000 ETFs listed in the U.S., with an annual revenue run rate of $18.1 billion, a significant portion of products may not be covering their operating costs. A study indicates that around a third of products are unprofitable, particularly those offered by issuers with multiple products.
Product closures, which slowed in 2024 after a record rate in 2023, are anticipated to increase as ETF issuers reevaluate their offerings and focus on profitability by consolidating products within the same category. Approximately 500 ETFs are considered at high risk for closure or strategy changes if they cannot cover operating costs after five years of trading.
In terms of portfolio construction, there has been a shift towards a more core/satellite approach, allowing for greater customization within ETF products to cater to the needs of different investors. ETFs play a crucial role in mass customization for advisors and wealth platforms, as well as in institutional portfolios that have become more simplified due to resource constraints.
Core assets, such as low-cost broad beta funds, dominate the ETF portfolio landscape, accounting for over half of aggregate AUM. However, they contribute only a quarter of total fees from a revenue perspective. Satellite characteristics like Cyclical Growth and Income are in high demand, while Volatility dampening and Correlation act as smaller additions to portfolios.
Overall, the outlook for the ETF market remains positive, with continued growth expected in AUM and product offerings. The industry’s ability to adapt to changing market conditions and provide innovative solutions to investors will be key to achieving the projected $10 trillion in AUM and beyond in the future.