Now for the $15 trillion question: What’s behind all the hype around exchange-traded funds (ETFs)?

While the ETF – an investment vehicle which places a pool of securities into one fund – has been around for three decades, its recent explosion in the investment landscape over the last few years is undeniable. Global ETF assets under management grew a record 27% year over year, reaching $14.6 trillion by the end of 2024, according to estimates from PricewaterhouseCoopers (PwC). That’s following a cumulative annualized growth rate of close to 20% between 2008 and 2023, based on a report from State Street Global Advisors, the Boston-based firm that launched the first ever ETF in 1993.

The sheer number of ETFs issued surged to more than 13,000 in 2024, up from about 2,500 in 2015, according to various financial analyst reports. Just in the first quarter of this year, more than 230 new ETF products were launched in the U.S. alone, Bloomberg News reported, a record number for a first quarter since 2015.

Intraday trading, tax optimization, liquidity and lower fees all work to make ETFs attractive investments. In addition, the U.S. Securities and Exchange Commission removed certain regulatory requirements in 2019, which made it easier for asset management firms to issue new ETFs – thus, further ramping up activity in this investment space.

Local investment giants – TCW Group in downtown Los Angeles and iM Global Partner Fund Management in El Segundo – are getting in on the action having launched 11 ETF funds since 2023 and nine since 2019, respectively. 

TCW first got into the investment vehicle in the fall of 2023 after acquiring Engine No. 1’s ETF business. This deal gave TCW two equity ETFs, and the firm has since launched additional products as well as converting some of its mutual funds to ETFs for a total of $2.8 billion in assets across all ETF product lines, as of April 25.

ETFs have typically been considered a passive investment vehicle and yet that view has evolved over the last 10 years, said Jennifer Grancio, Engine No. 1’s former chief executive who now serves as global head of distribution at TCW.

“If we look at the over ($14 trillion) invested in ETFs today – an ever-growing percentage – the biggest percentage in terms of new funds and asset raises is actually in the active strategies,” said Grancio, who has worked in the ETF business for the last three decades.

Between 2022 and 2024, the flow of cash into global active ETFs increased by two-and-a-half times, reaching $290 billion at the end of 2024. Still, Grancio noted that there’s also “rapid growth” on the passive fixed income side too.

ETFs versus mutual funds

The increase in the number and use of active ETFs and the outflows of mutual funds were deemed the top two factors that will have the most significant impact on the industry through this year, according to a 2024 survey from State Street.

When comparing ETFs to mutual funds, Jeff Seeley, chief executive of iM Global Partner Fund Management, said both investment vehicles provide the benefit of active management and long-term investing. Where ETFs have an upper hand is their ability to provide a bit more liquidity because they can be traded intraday as well as a tax advantage, he said.

Grancio echoed that sentiment on the competitive edge of ETFs.

“(Through ETFs), we’re in a position where we can manage and optimize the tax so that even if a strategy has positive performance over the course of the year, we can deliver a very low or zero cap gains experience,” Grancio said. “That tends to be a huge advantage to investors, as opposed to traditional mutual funds.”

ETFs can also provide investors more transparency as holdings are disclosed daily, whereas mutual funds can operate on a quarterly or monthly basis.

“When you’re pairing up investments, it’s important to understand the ETFs’ holdings, because you might not want an intended overallocation to an individual security given some concentration taking place in the marketplaces,” Seeley said. “…So being able to see what the underlying ETF holds is helpful to the adviser and client as they make those decisions.”

These investment benefits do not render mutual funds obsolete, said Seeley. iMGP still finds mutual funds useful despite ETFs’ higher growth rate.

Experts from State Street Global and Deloitte – which recently called active ETFs “a goldmine” – have estimated that ETFs will surpass mutual funds globally by assets in the next 10 years.

“With full transparency and the ability to track the performance of the market, ETFs are becoming a catalyst to push away mediocre performance,” Anna Paglia, chief business officer at State Street, said in the firm’s 2024 report. “Today, active mutual fund managers do not compete against their peers; they compete against ETFs for as little as 3 basis points. If they cannot beat these low-cost ETFs, they don’t have a chance at surviving.”

Advantages and versatility 

Aside from the mutual fund comparisons, Grancio outlined the benefits of ETFs over individual stock purchases. ETFs can prove to be more successful in outperforming the market over time and can allow investors to tap into markets they may be less familiar with but are intrigued by.

“In most cases, the reason to buy an ETF versus a stock is if there’s a part of the market that you’re interested in investing in, but you don’t know all the bonds, you don’t know all the companies, or you don’t know how to allocate between regions,” Grancio said. 

Sector ETFs allow people to gain exposure to an individual industry without having to pick an underlying company within that industry. For example, Grancio pointed to the TCW Transform Systems ETF (PWRD) which gives clients access to the upside of the energy and power sectors.

Investors who are attracted to ETFs are “extremely broad,” Grancio said. Large institutions take advantage of them for liquidity and managing exposure, and those in the wealth space use them for passive, thematic and active fixed income investing. ETFs are also being used in model portfolios and in the self-directed investor space.

“ETFs have gone from not really even being a vehicle people were using 30 years ago to being pervasive across all of these different segments,” Grancio said.

According to State Street, 70% of U.S. financial advisers recommend ETFs to clients and “a significant number” of global institutional investors reported using ETFs extensively. 

Competition and adapting to current climate

With new ETFs popping up every day, Seeley views iMGP’s partnership structure as a way to stay competitive. Each of the firm’s nine ETFs – totaling about $1.5 billion in assets – is sub advised by a partner firm in which iMGP has made a minority investment.

“Each one of (our partners) has a unique investment strategy that we utilize in each one of the distinctive ETFs,” Seeley said.

The firm’s largest ETF – the Managed Futures Strategy ETF (DBMF) which is sub advised by DBi and sits at about $1.1 billion in assets – provides exposure to the managed futures segment, which is an alternative investment used for market and portfolio diversification. 

Calling managed futures “a formerly exclusive, often expensive, but compelling asset class,” Seeley said DBMF expands the segment’s access to all investors.

iMGP recently launched a European version of this ETF listed on the Euronext exchange as iMGP DBi Managed Futures Fund R USD ETF, serving as the firm’s first global ETF offering.

Seely noted that ETF activity in European and overseas markets is not quite on the same level as the U.S. Still, he sees increased interest and innovation in the ETF markets abroad going forward.

While managed futures are often used for risk management, “it is very important that clients utilize or think about managed futures as a long-term allocation versus only adding as a hedge or tool during volatile markets,” Seeley said.

Regarding current market volatility, Seeley noted that iMGP’s dividend ETF (BDVG) is garnering more interest lately due to its more cautious approach and avoidance of companies with high valuations in favor of proven companies. Additionally, the managed futures ETF maintains traction due to its “lower correlation to equities and bonds,” he said.

Considering market uncertainties amid economic policies from President Donald Trump’s administration, Grancio noted that in times of equity markets being down, investors tend to sell some of their fixed income investments and increase their equity markets but said that ETFs may be less impacted.

“Because the fixed income ETF market is still relatively early, we don’t think that really affects flows in ETFs,” Grancio said. “We’re seeing more of the fixed income sell off on the mutual fund side.”

Significant outflows in mutual funds have been happening for years with Deloitte reporting a net outflow for long-term mutual funds in the U.S. as $2.9 trillion over the last decade, compared to a net inflow of $4.5 trillion for ETFs for the same period.

Keeping with this trend, the boom in ETFs is not expected to slow any time soon. PwC predicted that by 2029, ETF global assets under management will soar to $30 trillion. And further down the road, Matt Bartolini, head of ETF research at State Street, estimated that figure will reach $43 trillion by 2034.