ETF Industry’s Next 30 Years of Twists and Turns

As we celebrate three decades since the first U.S. exchange-traded fund debuted on trading floors, I can’t help but wonder what the next 30 years will bring for the industry.  

There’s the obvious, general stuff. The number of ETFs will probably keep rising, with an ever-expanding variety of funds for investors to choose from.  

Assets in ETFs will probably keep going up. Active ETFs might gain some share. 

Those things are easy to imagine since they continue trends we’ve been seeing for years now.  

But because it’s more fun and interesting, I’m going to think a little outside the box and offer seven ETF predictions for the next 30 years. 

SPY Loses Its ETFs Crown 

This is kind of a downer in a week in which we’re celebrating the first ETF in the U.S., but it’s clear that the writing is on the wall for SPY.  

The iShares Core S&P 500 ETF (IVV), the Vanguard S&P 500 ETF (VOO) and the Vanguard Total Stock Market ETF (VTI) have been gaining ground on the SPDR S&P 500 ETF Trust (SPY) for years thanks to slightly lower fees and some structural advantages. 

If current trends persist, all three of these ETFs will be larger than SPY in the next several years. With about $70 billion in assets separating SPY and IVV today, there’s a good chance SPY will lose the crown sometime around 2025.  

Even if SPY falls down the leaderboard, its place in industry history is secure, and so is its place as the most liquid ETF in the world. It trades $32 billion worth of shares per day, 15 –to 40 times more than its rivals. It also has a much deeper and more liquid options market.  

These are advantages that probably won’t go away anytime soon, if ever, even after IVV, VTI and VOO become larger. 

Vanguard Becomes No. 1 US ETF Issuer 

Like the last prediction, this one isn’t really going out on a limb; it’s simple extrapolation. Vanguard ETFs in the U.S. have collectively taken in more money than BlackRock ETFs for three years in a row. 

As of the end of 2022, the current No. 1, BlackRock, had $2.18 trillion in U.S.-listed assets under management through its iShares offerings, while Vanguard was right behind, with $1.87 trillion. The $317 billion that separates them is close to the narrowest on record. 

In 2020 and 2021, we saw Vanguard ETFs take in $79 billion and $117 billion more in assets than BlackRock ETFs, but in 2022, the difference was only $21 billion. 

So I imagine it’s going to be at least a few years before Vanguard can top BlackRock even under the best of circumstances. The date I pulled out of thin air is 2027. 

ETFs Surpass Mutual Funds  

While we mark the 30-year anniversary of the U.S. ETF industry, keep in mind that, next year, mutual funds will celebrate their 100th birthday! 

That 70-year head start is why after years and years of inflows for ETFs and years and years of outflows for mutual funds, the latter still commands 2.5x the assets—$16.3 trillion versus $6.5 trillion (according to year-end data from Morningstar). 

A $10 trillion gap is huge, so this isn’t something that’s going to happen overnight. But if last year’s flows are any indication (ETFs pulled in $600 billion while mutual funds lost $1 trillion), it’s only a matter of time before ETFs eclipse mutual funds in assets. 

My magic eight ball says this will happen in 2030. 

Influencer-Managed ETFs Proliferate 

Passive investing isn’t going anywhere. It’s proven; it works, and it’s the most appropriate option for most investors. 

But active investing isn’t going away either. The compulsion to try to do better than the market is strong—whether it be through one’s own doing or through the efforts of others. 

Cathie Wood and ARK are case in point.  

You can say she’s a traditional active fund manager. She’s been in the financial industry for decades and took a relatively conventional path to become a fund manager. 

But her success is far from conventional, and a large part of it has to do with how deftly she’s spread her message with the help of the internet.  

From her email lists, to her website, to her 1.5 million Twitter followers, Cathie Wood’s success in gathering large amounts of assets stems from her being a financial “influencer.” 

More recently, YouTuber Kevin Paffrath accumulated an impressive $16 million in assets in less than two months in his The Meet Kevin Pricing Power ETF (PP) thanks to his social media presence.  

Expect to see more successful ETF offerings from financial influencers in the future. 

Growing Competition From Direct Indexing 

The rise of ETFs over the past three decades has been relatively smooth. Sure, there were doubts about ETFs in the early days, but once investors understood the benefits of the structure, there was no stopping the growth of the industry. 

But sooner or later, competition will emerge, and at least today, the most likely contender seems to be direct indexing. 

We’ve seen for years how ETFs have sliced and diced the markets into increasingly narrow segments, giving investors a way to add all types of assets and strategies to their portfolios.  

But even with the breadth of ETFs we have today, these funds can’t match the customization that direct indexing provides. 

The ability to take an index and then mold it exactly to your liking—whether to outperform or for principles-based reasons—is extremely compelling.  

In 2022, Fidelity unveiled its FidFolios offering, where investors can create completely custom indexes or modify preexisting model indexes. While experience isn’t completely seamless, I can already see the potential that this type of investing has. 

Direct indexing isn’t new, but it’s far from mainstream. And I think what’s holding it back is the technology and the user experience.  

As those improve, direct indexing may become a legitimate threat to ETFs. 

ETFs Are Tokenized 

Crypto is a mess right now. Frauds, hacks and negligence are all too common in the industry, which is still reeling from the demise of the once-popular exchange FTX. 

We’re still a long way off from a time in which the crypto industry becomes reliable enough for the average person to trust it.  

But the underlying technology that the crypto industry is built around is extremely powerful and its use will only continue to grow.  

In an increasingly digital world (Apple is anticipated to release a “mixed reality” device this year) digital assets are naturally going to proliferate. 

Whether it be cryptocurrencies, digital collectibles, access tokens or tokenized intellectual property rights, a lot of assets are going to exist on blockchains, where they will benefit from the transparency and the innovation that the technology enables.  

Assets that we consider to be securities today will be included in that mix. 

Securitylike assets already exist on blockchains (sometimes, illegally), but in the future, once the regulatory landscape is clearer, we can expect more of them, including stocks, bonds, and yes, ETFs. 

These won’t be the same ETFs we use today. Tokenized funds will have the benefit of being able to interact with a growing ecosystem of decentralized financial applications. 

ETFs as We Know Them Today Don’t Even Exist 

Let’s be real: 30 years is a long time. The financial industry three decades from now will probably be unrecognizable compared to what it is today. After all, ETFs didn’t even exist in the U.S. three decades ago.  

But I think that example underestimates how quickly things will change in the next 30 years. It’s easy to assume that the pace of change in the financial industry going forward will be the same as it was in the past. 

For the most part, the financial industry has evolved at a pretty glacial pace compared to other industries, and that’s understandable when you’re dealing with something as important as people’s hard-earned money. 

But technology today is advancing at a mind-blowing speed (if you’ve been paying attention to what’s going on with AI recently, you know what I’m talking about). 

It would be foolish to think that the financial industry will somehow be unaffected by that change. Crypto is one area where we know a lot of financial innovation is happening, but most of the financial technologies we’ll see in three decades haven’t even been imagined yet.  

Thirty years from now? I wouldn’t be surprised if ETFs as we know them today don’t even exist. 

Email Sumit Roy at [email protected] or follow him on Twitter @sumitroy2