The Future of ETFs

Exchange-traded funds (ETFs) are growing in popularity as a result of recent shifts in the markets and the 2019 Federal Reserve interest rate cuts. In fact, the ETF market has recently surged to $4 trillion assets under management (AUM) following a series of price wars and a new rule passed by the SEC. This is good news for investors looking to expand their ETF portfolios and suggests there may be further growth ahead. But where exactly is the ETF market headed in the future and what are the trends investors should watch out for?

“I think in the next 20 years, we’re going to see a decline in the expansion of ETFs,” says Dave Nadig, chief investment officer of ETF.com. But Nadig is quick to point out that this isn’t likely to affect the performance of ETFs in general and that continued growth is still a likely outcome—at least in the immediate future. However, as technology continues to reshape the financial services landscape, the popularity of direct indexing platforms could change how investors view ETFs in the long term.

Where ETFs Are Headed

According to Nadig, one of the main ETF trends investors are likely to see over the next decade is continued growth. “I think the core ETF value proposition, which is extremely low-cost beta that’s transparent, tax efficient and easy to trade, isn’t going to go away,” he says. In fact, he believes that within the next five years, ETFs are likely to surpass mutual fund assets in the United States.

Looking further ahead however, Nadig believes that high-tech platforms will lead to increased competition among asset management firms and redefine the way investors think about their overall portfolios. “I think that these alternative platforms, whether you call them direct indexing or not, are the future of consolidated investment management,” he says, explaining that these shifts are part of larger technological trends that are reshaping the financial landscape.

The Future of Asset Management

While these bigger changes are further ahead on the horizon, Nadig believes that they’re likely to start with smaller companies and expand out from there. “I think you’re going to see this be very disruptive initially,” he explains, emphasizing that the key players in this space are smaller financial companies who are not necessarily looking to compete with larger financial firms—at least not for the moment. “Eventually they’ll have to compete, but they have such an edge in the low-cost beta space that I think you’ll see them focus there for the foreseeable future.”

With ETFs currently experiencing significant growth, it seems likely that they will continue to be an attractive option for investors looking to diversify their portfolios without increasing the time and effort they need to spend on managing their assets. But with changing technologies reshaping the financial services industry, the long-term future of ETFs remains to be seen.