ETFs Are Booming, Here's Why

ETFs are having a moment. According to a recent EY report, global ETF assets under management (AUM) surged to $14.8 trillion last year, with net inflows hitting $1.88 trillion, the highest ever recorded. The U.S. market alone crossed the $10 trillion mark.

Continuing the stroke of fortune, January 2025 brought in an all-time high of $90.3 billion in net ETF inflows in the U.S. alone, according to research firm ETFGI. So, what's driving this boom?

Also Read: As Trade War Heats Up, These ETFs Offer A Safe Harbor For Investors

The Tax Advantage

A major reason ETFs are so popular in the U.S. is their tax efficiency. Nithin Kamath, CEO of Indian online brokerage platform Zerodha, recently pointed this out in a post on X. He explained that mutual funds in the U.S. are required to distribute capital gains to investors, making them less tax-efficient. In contrast, ETFs use an ‘in-kind' creation/redemption process, which helps them avoid capital gains distributions, giving investors a clear tax advantage.

This tax efficiency is one of the most underrated reasons why ETFs have taken off in the U.S.

Big Money Is Flowing Into ETFs

Investors are pouring money into ETFs despite broader market volatility. Take what happened on February 24, even as markets declined, ETFs saw massive inflows. According to etf.com, SPDR S&P 500 ETF Trust SPY raked in $3.87 billion, iShares Core S&P 500 ETF IVV pulled in $1.02 billion, Vanguard S&P 500 ETF VOO saw $883.6 million inflow and iShares Core MSCI Emerging Markets ETF IEMG brought $365.6 million.

Overall, U.S. equity funds led the way with $3.59 billion in inflows, followed by fixed income ETFs with $1.78 billion and commodities ETFs adding $754.2 million, reported etf.com.

Innovation Is Key

Beyond tax advantages, the ETF industry is constantly evolving, offering investors a growing variety of options:

Active ETFs are on the rise, now accounting for 8% of U.S. ETF assets and attracting nearly half of all U.S. ETF inflows, per EY. According to Morningstar, U.S.-listed active ETFs attracting a record $43 billion in inflows in January. This growth follows 579 active ETF launches on Wall Street in 2024, according to Morningstar.

Single-stock ETFs, which allow investors to take leveraged bets on individual stocks, have grown to $7 billion in assets, said EY.

The outlet also reported that buffer ETFs, offering downside protection, now hold $45 billion, while digital asset ETFs, especially Bitcoin ETFs, have soared in popularity with the five largest products amassing $70 billion in AUM.

More Players Are Entering The ETF Space

As ETF assets continue to grow, more firms want a piece of the action. The EY report highlights that asset managers looking to enter the market typically take one of five routes — develop in-house ETF capabilities (best for large firms), acquire an existing ETF issuer, use white-label ETF providers to launch funds quickly, transform mutual funds into ETFs (57 mutual funds were converted to ETFs in 2024) and newer model in Europe where mutual funds offer ETF-like share classes.

The Road Ahead

With all these trends in motion, the global ETF industry is on track to hit $25 trillion in AUM by 2030, according to EY.

Between tax advantages, product innovation, and rising retail adoption, ETFs look good to continue their unstoppable growth in the years ahead.

If the past year is anything to go by, the ETF revolution is far from over.

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