Exchange-traded funds (ETFs) achieved record-breaking milestones in 2024, setting the stage for another transformative year in 2025.
With $1.6 trillion in inflows, global ETF assets surpassed $15 trillion, and fund launches reached a remarkable 1,485, according to a new report from BofA Global Securities. These developments signal a growing appetite among investors for the liquidity, tax efficiency, and market access that ETFs provide, positioning them as an essential tool for wealth advisors and RIAs managing diverse client portfolios.
The Rise of Alternative Investments in ETFs The BofA report, authored by Jared Woodard, John Glascock, and Phoebe Block, highlights an emerging trend: the packaging of alternative investments within ETF structures. Asset managers are exploring opportunities to bring private equity, private credit, digital assets, and multi-leg options strategies into the ETF space, addressing investor demand for nuanced exposures. For wealth advisors, this evolution represents a chance to offer clients innovative solutions that blend traditional diversification benefits with the accessibility of ETFs.
The appeal of ETFs as a vehicle for alternative investments lies in their ability to provide daily liquidity and simplified reporting compared to direct investment in alternatives. As these products gain traction, RIAs should consider their potential role in client portfolios, particularly for those seeking enhanced returns or hedging strategies in a low-yield environment.
Active ETFs: A Growing Force
One of the most significant shifts in 2024 was the surge in active ETF launches, which outpaced passive ETF introductions for the first time. The transition reflects asset managers’ efforts to capture investor interest in actively managed strategies while offsetting mutual fund outflows. According to BofA, 121 mutual funds converted to active ETFs last year, with many successfully reversing prior outflows.
Prominent firms such as MFS Investment Management, Charles Schwab, Fidelity Investments, and Vanguard have all signaled plans to expand their active ETF offerings. Vanguard, in particular, has emphasized growth in its fixed-income segment, underscoring the increasing demand for income-focused strategies in the current market. For RIAs, active ETFs offer an opportunity to deliver alpha-driven solutions while retaining the tax efficiency and liquidity benefits of the ETF wrapper.
Cost Sensitivity in Passive Investing
While active ETFs have gained momentum, passive ETFs continue to attract substantial inflows, particularly those with ultra-low expense ratios. Vanguard’s S&P 500 ETF (VOO), for example, outpaced the SPDR S&P 500 ETF Trust (SPY) in flows this year, amassing $593 billion in assets. The cost advantage—VOO charges 6.5 basis points less than SPY—has become a critical factor in the highly competitive passive ETF market.
For wealth advisors, the takeaway is clear: cost-conscious clients are increasingly gravitating toward low-fee options. Incorporating cost-effective passive ETFs into portfolios can help enhance net returns while meeting client preferences for efficient market exposure.
Tax Efficiency: A Key Selling Point
The tax efficiency of ETFs remains one of their strongest selling points, particularly when compared to mutual funds. The creation/redemption process inherent to ETFs has saved investors approximately $250 billion in taxes since 2001, according to BofA. For RIAs managing taxable accounts, leveraging ETFs can provide significant advantages, helping clients minimize tax drag and optimize after-tax returns.
Sector Trends and Opportunities for 2025
Despite strong performance in sectors such as banks, energy, and gold during 2024, ETFs tied to these areas experienced outflows. BofA analysts attribute this disconnect to investor caution but expect the trend to reverse in 2025 as "flows follow price." Wealth advisors should closely monitor sector-specific ETFs, particularly those poised to benefit from economic tailwinds, and consider incorporating them into portfolios as tactical opportunities arise.
Navigating a Dynamic ETF Landscape
As ETFs evolve, wealth advisors and RIAs must stay ahead of the curve to deliver value to clients. The following considerations can help guide portfolio construction and strategy in the year ahead:
Diversify with Alternatives: Explore emerging alternative ETFs as a means to provide clients with exposure to private markets, digital assets, or complex options strategies, while retaining the benefits of liquidity and transparency.
Capitalize on Active Management: Leverage the growing universe of active ETFs to access alpha-driven strategies, particularly in fixed income or niche equity segments.
Prioritize Cost Efficiency: In a competitive market, expense ratios remain a key determinant of ETF performance. Focus on cost-effective options to maximize client outcomes.
Emphasize Tax Advantages: Highlight the tax efficiency of ETFs to clients, particularly those in higher tax brackets or with significant taxable portfolios.
Adapt to Sector Dynamics: Stay agile in response to shifting sector trends, identifying opportunities in undervalued or recovering segments.
As ETFs continue to set records and innovate, their role as a cornerstone of modern investment portfolios is only expected to grow. By embracing these developments, wealth advisors can position themselves as trusted guides in an increasingly complex financial landscape, ensuring clients reap the full benefits of this dynamic asset class.
