ETFs Face New Challenges in 2025 After Record-Breaking Year
The exchange-traded fund (ETF) industry is bracing for a new set of obstacles in 2025, following a remarkable year that saw a record $1.1 trillion in inflows in 2024. This surge in popularity can be attributed to a combination of factors, including the bull market in the US, the emergence of innovative cryptocurrency and options-based products, and the growing preference for lower-cost, liquid ETFs over mutual funds.
A Crowded Market Ahead
As the ETF market continues to grow, analysts are cautioning that not all products will resonate with investors. Bryan Armour, ETF analyst at Morningstar, predicts that 2025 will see a record number of ETF closures, surpassing the 253 funds shut down in 2023. “The market is saturated with new products, and many won’t survive due to lack of uniqueness and appeal,” Armour warns.
The Rise and Fall of ETFs
According to Cerulli Research, the average lifespan of an ETF has been declining, falling below 5 years by early 2024. This trend is expected to continue, with firms recognizing the need to quickly close underperforming funds and redeploy resources. Matt Apkarian, associate director at Cerulli, notes, “Firms are becoming more agile in shutting down funds that don’t attract assets.”
Industry Insiders Remain Bullish
Despite the challenges ahead, industry insiders remain optimistic about the ETF industry’s prospects. Globally, ETF assets have jumped to $14 trillion as of December 27, up from $11.6 trillion at the end of 2023. The number of new ETF launches has also reached an all-time high, with 714 products introduced by the last full week of 2024.
Options-Based ETFs Take Center Stage
One of the key drivers of the ETF boom is the surge in interest for products that use options to manage risk. The proliferation of buffer and defined outcome ETFs, which offer investors a trade-off between upside potential and downside risk, is a significant feature of 2024. Goldman Sachs Capital Management is set to launch a buffered ETF product in the first quarter of 2025, further expanding the options-based ETF landscape.
A New Normal for Inflows?
David Mann, global head of ETF product and capital markets at Franklin Templeton, believes that $1 trillion in inflows may become the new norm for the ETF industry. “This has been a one-way train ride, and now the train is on the express track,” Mann remarks. As the ETF industry navigates the challenges ahead, one thing is clear: the landscape is changing, and only the most innovative and appealing products will thrive.
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