Crypto, Flows, Rules: What's Left for ETFs This Year?

From crypto ETF launches to record launches, the exchange-traded funds world is abuzz after a highly eventful first eight months of the year.

Spot bitcoin ETFs made their long-awaited debut, shattering industry launch records; ETF launches overall are on record pace, led by single stock ETFs, buffer ETFs, and all flavors of actively managed strategies. The Vanguard S&P 500 ETF (VOO) has already eclipsed the annual ETF inflow record, vacuuming-up over $60 billion. Nearly every major asset manager is pushing further into ETFs. It’s an exciting time for the industry.

What else 2024 may have in store? With everyone returning to the office after Labor Day marked the unofficial end of summer, here are three ETF stories I’m watching for the remainder of the year.

Annual ETF Flows Record in Sight

Will ETFs break their annual inflow record? Through the end of August, ETFs have taken-in over $600 billion in new money. The annual ETF inflow record is just over $900 billion, a mark that was set in 2021.

The fourth quarter has historically been the industry’s strongest when it comes to inflows, so it is entirely feasible that ETFs surpass 2021’s record. The biggest key is likely the stock market’s performance given the upcoming election, uncertainty over Fed rate cuts, elevated valuations and simmering geopolitical issues. 

If the stock market meaningfully falters, the ETF inflow record might be difficult to achieve. If equities continue their upward march, I expect the industry to be popping champagne in late-December. Either way, ETF inflows are set to blow past the totals posted in 2022 and 2023, the two other best years for ETFs.

ETF Share Class Structure

Will there be any movement on the ETF share class structure? Over twenty fund companies—including stalwarts such as Dimensional, Fidelity, and T. Rowe Price—have filed for exemptive relief from the SEC to offer an ETF share class of existing mutual funds. 

Vanguard’s patent on the multi-share class structure expired last year and other issuers now want in. The challenge is that these firms are seeking to use this structure for actively managed strategies, whereas Vanguard only uses it for index-based funds. 

The SEC has concerns regarding “share class subsidization”, whereby one class of shareholders could be negatively impacted by another. An example would be if the mutual fund share class has significant outflows, that could trigger negative tax consequences and higher transaction costs for ETF shareholders.

The last bastion for mutual funds is the retirement plan space, which is extremely lucrative for fund companies. An ETF share class would allow mutual fund companies to maintain this cash cow business, while also pursuing the much higher growth ETF market. This would be a boon for the industry as it would allow funds companies to have their cake and eat it too. But will the SEC allow that to happen?  

What’s Next for Crypto ETFs?

Spot bitcoin ETFs have rewritten the record books with one hand tied behind their back. Many wirehouses have yet to even approve the products on their platform, but that didn’t prevent spot bitcoin ETFs from bringing in a staggering $18 billion in net inflows over their first eight months. Spot bitcoin ETFs were followed by the launch of spot ether ETFs, which have experienced $500 million in outflows over their first six weeks – primarily the result of an exodus from the Grayscale Ethereum Trust (ETHE).  

Will financial advisor and institutional adoption of these products accelerate? Will the SEC approve filings for combined spot bitcoin and ether ETFs from Hashdex and Franklin Templeton? Will the SEC finally allow options trading and in-kind creation/redemption for these products? How might the upcoming election impact the prospects for other spot crypto ETFs such as Solana?  

There are a lot of important questions which could be answered before year-end.