With a cadre of Americans getting ready to transfer their wealth and a generation of young people eager to manage their own investments, assets in exchange-traded funds over the next decade are expected to nearly double, surging by $10 trillion. So said financial experts who gathered on July 17 in New York City to discuss State Street Global Advisors’ 2024 ETF Impact Survey.
The annual survey, carried out in April, shows that more than two-thirds of financial advisors, or 70%, “always” or “often” recommend ETFs to their clients, while a similar percentage of institutional investors, or 67%, use ETFs in investment strategies.
The Boston-based firm’s SPDR ETF Impact Report 2024-2025: The Next Wave of Innovation, indicates that ETFs reached $11.1 trillion of assets under management on the last day of 2023. That represents a cumulative annualized growth rate of 19.8% since 2008. At the same time, the number of ETF offerings globally has increased to 9,149 funds. The report provides a comprehensive analysis of the global survey findings and SPDR’s top predictions on the future of ETF growth.
“ETFs are a positive market that is evolving,” said Anna Paglia, chief business officer at State Street Global Advisors, adding that during the COVID pandemic, people were stuck in their homes with the time to study their investments and financial markets. They began moving assets from stocks into ETFs. Now that trend is evolving as plan sponsors move increasingly into the ETF investment space. “ETFs are not a niche and are here to stay. People are paying attention,” she said.
Michael Arone, chief investment strategist at State Street Global Advisors, estimates that $22 trillion of wealth will be transferred over the next decade by people between the ages of 65 and 74.
And while the baby boomer generation grew up investing in mutual funds, younger investors’ receptivity for ETFs and their desire to make their own investment decisions will combine to spark tremendous growth in the ETF investment space, added Arone.
“This younger generation is schooled on ETFs as an investment … they are familiar with ETFs,” said another panelist, Scott Chronert, a U.S. equity and ETF strategist at Citigroup.
The ETF market also will grow as younger workers shift jobs more frequently and move their 401(k} money from employer-provided, defined contribution plans into rollover individual retirement accounts (IRAs) and choose to invest more heavily in ETFs. Chronert estimated that asset managers are expected to move $6 trillion to $10 trillion out of taxable mutual funds into ETFs in the coming years.
Additional ETF Growth Opportunities
“We are excited about the industry’s ability to evolve,” Paglia said, adding that bitcoin investments are another potential growth area.
Arone said he expects the number of investors outside the United States to grow tremendously, presenting an opportunity that’s ripe for development. According to the 2023 Investment Company Factbook, “the majority of worldwide total net assets in regulated funds continued to be held in the United States (48%) and Europe (32%).” .
The 2024 ETF Impact Survey showed that while less than half of all individual investors, or 45% now have ETFs in their portfolio, that percentage is up from 40% in 2022 and poised for additional growth as investors learn about ETFs.
Individual investors’ use of ETFs is highest among younger individuals, as 58% of millennial investors report holding ETFs, compared to 47% of Generation X investors and 37% of baby boomers. The top reasons individual investors cite for holding ETFs in a portfolio include diversification benefits (49%), access to specific asset classes/exposures (47%) and lower costs/expense ratios (39%).
Sixty-five percent of investors say that ETFs have improved the overall performance of their portfolio, up from 59% in 2022. The portion of investors who believe ETFs have made them a better investor has held steady at 54%, compared with 53% in 2022.
Financial Advisors Back ETFs
While less than half of individual investors have ETFs in their investment portfolios, nearly 70% of advisors recommend ETFs to their clients “always” or “often,” and 67% of institutional investors use ETFs in their investment strategies “extensively” or “frequently.”
The top three reasons behind financial advisors’ backing of ETFs for clients include: cost efficiency (44%); diversification benefits (43%); and trading flexibility (43%). When making a choice between ETFs that offer the same or similar exposure, financial advisors consider these three factors: best track record/performance (58%); lowest expense ratio (54%) and highest liquidity (54%).
Yet advisors also have their work cut out for them to better educate clients about ETFs. The majority of investors who don’t hold ETFs in their portfolios think that they are “difficult to understand,” according to the State Street survey. More specifically, they don’t really understand how ETFs are priced, how they trade, why they’re tax efficient, and even how they differ from mutual funds.
Institutional ETF Use
The survey showed the top three reasons behind institutions’ use of ETFs: their diversification benefits (65%), cost efficiency (60%) and cash/liquidity management (54%). When making a choice between ETFs that offer the same or similar exposure, institutions consider the most important factors to be highest liquidity (66%); best track record/performance (62%) and lowest total cost (53%).
First carried out in 2022, the State Street survey is designed to understand a wide range of investor attitudes and perceptions about ETFs, the market and the economy. State Street Global Advisors, together with A2Bplanning and Prodege, conducted its online survey among individual investors, financial advisors and institutional investors. Data was collected from April 1 to 25, 2024 from a nationally representative sample of 1,000 adults 18 years of age and older.
Paula L. Green is a New York City-based freelance journalist with more than three decades of reporting and editing experience that spans coverage of international business and finance issues to murders and politics at the Jersey Shore to presidential press conferences in Argentina and Mexico. She can be contacted by plgreen12004@gmail.com.
The top three reasons behind financial advisors’ backing of ETFs for clients include: cost efficiency (44%); diversification benefits (43%); and trading flexibility (43%). When making a choice between ETFs that offer the same or similar exposure, financial advisors consider these three factors: best track record/performance (58%); lowest expense ratio (54%) and highest liquidity (54%).