ETFs: The 21st Century’s Investment Revolution

We are almost a quarter of the way through the 21st century, after 25 years of transformational technological advances in many fields. In finance, the ETF has been the revolutionary investment tool of the century so far.

The first ETF was in fact born in 1993 — with our SPY, tracking the S&P 500 — but they have snowballed in scale since the turn of the millennium, and now form a vital part of the institutional investor toolkit.

Room For Further Growth

And there is plenty more headroom for expansion. Over the past three decades, total ETF AUM has grown from zero to US-Dollar 11.1 trillion globally.¹ But, as passive and active ETFs account for less than 12 percent of investable assets globally² there is room for growth.

Once seen as a passive-only, equity-only tool, ETFs now provide a highly liquid, cost-effective, and transparent way to invest in all corners of the market, actively, and passively. With more than 9,149 ETFs available globally,³ more investors can gain exposure to an increasingly wide variety of market segments.

Although a tool that was once considered retail-only, ETFs are now key building blocks within many portfolios, attracting inflows from retail and institutional investors around the world.

The story began in January 1993, with the opening bell of the first US-listed exchange traded fund (ETF) – our own SPDR® S&P 500® ETF Trust (SPY). ETFs now cater to the full spectrum of investment strategies — including active management, factor-based strategies, and thematics — and cover everything from traditional asset classes to specialty markets and innovative sectors like technology and sustainability.

Behind their robust, decades-long evolution lies increasing investor demand for transparency, liquidity, and cost efficiency, coupled with the desire for more specialized investment solutions.

The proliferation of ETFs across various asset classes and the introduction of novel ETF structures — from strategies that use derivatives to structured outcomes to spot-based commodity and currency exposures — highlight the industry’s adaptability.

Useability is Driving Adoption

Several compelling factors are driving the broader adoption of ETFs. According to the State Street Global Investors 2024 ETF Impact Survey, respondents ranked the following reasons for ETF usage at the top of their lists:

• Flexibility in Trading 

ETFs are traded on major stock exchanges, just like individual stocks. This trading flexibility allows investors to buy and sell ETF shares throughout the trading day at market prices — offering investors more control over investment decisions and enabling strategies such as tactical asset allocation and liquidity management.

• Liquidity Management 

ETFs are known for their high liquidity, or their ability to be easily bought and sold in large quantities without significantly affecting their market price. This liquidity is particularly appealing to institutional investors who need to manage large volumes of assets efficiently. This ability ensures that ETFs remain a flexible and responsive tool in portfolio management. 

According to the survey, 91 percent of institutional investors who identified as heavy ETF users report that liquidity is important to their institution’s investment strategy.

• Diversification

ETFs offer inherent diversification by pooling various assets into a single fund, which can track a specific index, sector, commodity, or even a country’s economy. This feature allows investors to spread their risk across multiple assets without needing to buy each one individually. For example, an ETF that tracks the S&P 500® gives exposure to 500 different companies, providing instant diversification.

ETF product ranges are expanding to support more asset classes, and critically, the demand for active ETFs is continuing to grow. They currently account for 41 percent of US-listed ETFs, though in terms of AUM, they only account for 5 percent⁴. So there is room for more growth.

Here’s to the next 25 years!

Footnotes
¹Morningstar, Bloomberg Finance, L.P., as of December 31, 2023.
²Morningstar, as of December 31, 2023. Past performance is not a reliable indicator of future performance.
³Morningstar, Bloomberg Finance, L.P., as of December 31, 2023.
⁴State Street Global Advisors, as of July 23, 2024