The ETF Boom: What’s In Store for 2025

Takeaways

This year tracks as a record for ETF launches among US issuers
Investors have demanded high-yield, protection, and crypto-related funds in 2024
New strategies emerge, including innovations in the tax space, as the ETF universe expands

There’s a problem brewing in the world of ETFs: We are running out of ticker symbols. Bloomberg recently reported that, with so many new funds hitting the marketplace in recent years, issuers are forced to produce catchy four-letter ticker symbols rather than the more eye-pleasing three-letter abbreviations. In a mad dash to safeguard the marketability of new exchange-traded products, there are reports of fund companies hoarding would-be ticker symbols.¹

This desperation might have seemed laughable a couple of decades ago when the ETF business was a shadow of the mutual fund industry. After years of rapid growth among index funds, new investment themes, and the more recent popularity surge of income-focused ETFs, it’s not surprising that congestion has reached a new high. Combine those factors with many investors who are wealthier than ever and increasingly bullish on stock market returns, and 2024 continues to be the biggest boom yet for ETFs.²

Our data backs up that claim. According to Wall Street Horizon’s tracking of 245 US ETF providers, the four quarters ending on September 30 marked the largest number of new funds hitting the market. With just a few weeks of Q4 data tallied, the current quarter may be poised to eclipse the mark from a year ago. “It’s been an impressive year for ETF adoption and innovation setting the stage for more growth in 2025,” noted Todd Rosenbluth, Head of Research at TMX VettaFi.

Over the summer, we detailed the ETF “relay.” Yield, protection, and cryptocurrency have been 2024’s ETF Olympians. Investors can count on Wall Street innovation to meet them where they are, and as the thirst for dividend returns, defined outcome strategies, and access to new supposedly hot corners of the investable universe grow, a quenching suite of ETFs is usually not long from going live.

ETFs: Investors’ Yin and Yang

Amid all of these new slices and dices, the shine still isn’t off the Magnificent Seven stocks (Apple, Microsoft, Alphabet, Amazon, Nvidia, Meta, and Tesla). For more than two years, the group of tech and tech-related companies that command the biggest stakes in the S&P 500® have been popular for retail investor ownership.

The Roundhill Magnificent Seven ETF (MAGS) debuted in April 2023 and is now encroaching on $1 billion in assets under management.³ On the flip side, contrarian investors can consider getting their fix with the Defiance Large Cap ex-Mag 7 ETF (XMAG) which launched just last month.⁴

Goldman Ruffles Index-Fund Feathers

Indeed, diversification could be among 2025’s ETF themes. In October, Goldman Sachs published a controversial research note suggesting that the market-cap-weighted S&P 500 might deliver annual returns of just 3% over the next decade. The opinion was that lofty valuations within the Mag 7, among other factors, and a historic mega-cap bull market may have pulled forward returns.⁵

Goldman, along with Bank of America, Vanguard, and others point to perhaps more appealing valuations elsewhere. GS and BofA appear to be more bullish on the S&P 500 Equal-Weight Index while Vanguard’s outlook seems to favor higher returns in value stocks, small caps, and even international equities.⁶

Now, if you’re an index fund investor who has been around the block a time or two, you probably scoff at such broad and squishy capital market assumptions. After all, these same 10-year forecasts have made the rounds across trading desks and through various financial media channels since well before the Mag 7 (or even the “FAANG” stocks) became a household term.

Will next year finally be the year of a great rotation into long-time underperforming areas? Nobody knows for sure, but perhaps recent nudges by Wall Street sages lay the groundwork for a new batch of ETFs focused on diversification.

AI’s Next Branch

What could be another area of ETF proliferation in the new year? AI with a twist. This month marks the second anniversary of ChatGPT’s launch, and despite its fits and starts, AI’s intrigue has only grown.⁷ Of course, names like NVIDIA, AMD, and Broadcom have reaped benefits from the bull market in semiconductors, but the boom has evolved to include a once-dull sector: Utilities.

The power-generating sector was second only to Information Technology for the top S&P 500 sector return through mid-October.⁸ In fact, the top SPX stock year-to-date is Vistra Energy (VST), now the 10th-largest holding in the Utilities Select Sector SPDR® Fund (XLU).⁹

ETF investing is often about skating to where the puck will be, but predicting the next wave of fund themes is no small task. Looking back, it makes total sense that increased demand for electricity could be due to the rise of power-intensive data centers, which may have led to a major boost to independent power producers within the Utilities sector.

Our colleagues at TMX VettaFi are hard at work scanning the ETF landscape for new ideas and hidden gems with the new year on the doorstep.

Taxes in the Spotlight

Maybe the next ETF story isn’t solely about investments at all, but regarding taxes. The team at Cambria Investment Management partnered with ETF Architect to launch the Cambria Tax Aware ETF (TAX). The mechanics quickly turn complex, but the upshot is that this new fund aims to allow investors to seed the launch of a new no-dividend ETF with existing holdings, including highly appreciated securities, without owing capital gains tax on the exchange.¹⁰ With an uncertain tax situation next year and beyond, could no-yield and tax-light ETFs be the next big thing? We’ll leave that up for debate.

The Bottom Line

It has been an exciting year across global markets. Stocks have the finishing line in sight to mark a second-straight year of big gains, shares of AI-related and growth companies have collectively performed well, and new ETF strategies keep popping up. Next year may be primed for a continued boom in new fund types that could even stretch beyond typical investment themes.

¹ America Risks Running Out of Tickers for Single-Stock ETFs, Bloomberg, Katie Greifeld, October 4, 2024, https://www.bloomberg.com
² US household wealth rises in Q2 to record $163.8 trln, Retuers, September 12, 2024, https://www.reuters.com
³ MAGS Magnificent Seven ETF, Roundhill Investments, November 5, 2024, https://www.roundhillinvestments.com
⁴ XMAG: The First ETF Offering Exposure to the S&P 500 Excluding the “Magnificent 7” Tech Giants, Defiance ETFs, November 4, 2024, https://www.defianceetfs.com
⁵ Desperate to Diversify: Concentration Risks Creep Higher, VettaFi, Kristen Chang, October 30, 2024, https://www.etftrends.com
⁶ Market perspectives, Vanguard, October 16, 2024, https://advisors.vanguard.com
⁷ History Of ChatGPT: A Timeline Of The Meteoric Rise Of Generative AI Chatbots, Search Engine Journal, Annabelle Nyst, October 9, 2024, https://www.searchenginejournal.com
⁸ History Of ChatGPT: A Timeline Of The Meteoric Rise Of Generative AI Chatbots, Search Engine Journal, Annabelle Nyst, October 9, 2024, https://www.searchenginejournal.com
⁹ Stockcharts, November 4, 2024, https://stockcharts.com
¹⁰ Cambria Partners with ETF Architect to Launch Innovative Tax-Aware ETF, Business Wire, October 3 2024, https://www.businesswire.com

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