ETF Flows Set for Record; Big Money Enters High-Risk Funds

U.S. exchange-traded fund flows are on track to break records again in 2025, with $1.2 trillion projected to pour into the market despite modest performance by stocks and bonds, according to a Bloomberg Intelligence midyear outlook report.

The relentless appetite for ETF products has persisted even as U.S. stocks have posted volatile performance and gained around 3% year to date. Bonds have also gained roughly 3% as well, the report showed.

Active Management Drives Flows

The continued surge in ETF flows demonstrates how the product has become a default vehicle for investors regardless of market conditions, driven by innovation in active management and crypto products alongside sustained demand for cheap beta exposure, Bloomberg Intelligence Analysts Eric Balchunas and Athanasios Psarofagis said.

ETF flows usually slow when markets cool but not this year. A steady stream of cash is going into gold and cash-like ETFs too, according to the outlook.

Another reason flows are so robust is that active management has entered the market in full, adding to steady, passive flows. The products as a group are taking in 40% of net flows despite holding only 10% of the assets, the analysts found.

Most of the flows are going to active equity, a category that was dormant for the first 20 years that ETFs existed, according to the report. The best-selling active funds this year include a diverse group of covered call, CLO and thematic ETFs.

Big Money Flows to High-Risk ETFs MSTY, TSLL

Some high-risk active ETFs are also pulling in "big money," such as the YieldMax MSTR Option Income Strategy ETF (MSTY) and the Direxion Daily TSLA Bull 2X Shares (TSLL), the report found.

Beyond the flows, more than 900 ETFs may launch this year, crushing last year's record of just over 700. Nearly 90% of this year's launches are active, Bloomberg Intelligence data show.

This year, 16% of ETF launches have been some form of a single-security strategy that uses either leverage or options overlays, according to the outlook. Retail trades made up about 20.5% of U.S. equity volume in the first quarter, up from 17% a year earlier.

While the average fee across the ETF industry is around 59 basis points, single-stock strategies command a premium, averaging 91 basis points, according to the report. For those with leverage or derivatives overlays, fees often exceed 100 basis points.

Assets in leveraged long ETFs have nearly returned to their record $101 billion, highlighting the strong risk appetite still present among investors, the research shows.