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ETFs took in record $1.1 trillion in inflows in 2024

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Arena is increasingly crowded

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Morningstar ( MORN ) analyst sees possible record number of ETFs

closing

down in 2025

By Suzanne McGee

Jan 2 (Reuters) - U.S. exchange-traded funds could face

more obstacles to their runaway growth in 2025 after a bumper

year saw the products take in a record $1.1 trillion in inflows

in 2024.

The inflows were the most in the product's 35-year history

and came close to doubling last year's figure of $597 billion.

Analysts attribute the popularity of the products to a

combination of the bull market in the U.S., where the lion's

share of ETFs is based, the advent of innovative cryptocurrency

and options-based products and the growing preference by

investors for lower-cost, liquid ETFs over mutual funds.

Now, while many believe ETFs will top 2024's records in

2025, they are cautiously eyeing a new set of challenges ranging

from how to navigate an increasingly crowded ETF arena to the

ever-present question of innovation.

"I find myself thinking that new product development may

have outstripped investor interest in some of the most complex

of these strategies," said Bryan Armour, ETF analyst at

Morningstar ( MORN ). Not every product will 'land' with

investors."

Indeed, one of Armour's projections for 2025 is that the

market is likely to see a record number of ETFs closing down.

While asset managers shuttered some 186 funds in 2024 -- 91% of

which had less than $250 million in assets -- Armour expects

that figure to soar next year above the record of 253 set in

2023.

"There has been so much product development, and a lot of

ETFs won't survive to reach profitability simply because they

don't have anything that's unique enough and appealing enough to

pull in assets," Armour said.

According to Cerulli Research, 2023 was the first year that

saw the average lifespan of an ETF decline, and by early 2024 it

had already fallen below 5 years.

"Firms realize they have to be faster at closing down funds

that don't attract assets and at redeploying their resources,"

said Matt Apkarian, associate director at Cerulli.

Still, industry insiders say there are many reasons to be

bullish about an industry that globally jumped to $14 trillion

in assets as of Dec. 27, from $11.6 trillion as of December 31,

2023, according to industry research and consulting firm ETFGI.

The number of new ETFs launched, including a dozen spot

bitcoin products, reached 714 by the last full week of the year,

said Matthew Bartolini, head of SPDR Americas Research at State

Street Global Advisors. That compares to 543 launches in 2023

and 480 in 2021.

The explosion in the number of ETFs can be traced in part to

the surge in interest for products that use options to manage,

limit or even accentuate risk. The proliferation of buffer and

defined outcome ETFs, which use options to trade off upside

potential for downside risk, or to hit a target return, is one

of the biggest features of 2024.

"We'll be venturing into that market in the first quarter of

2025 with a buffered ETF product," said Brendan McCarthy, global

head of ETF distribution and capital markets at Goldman Sachs

Capital Management.

The two-year-old GraniteShares 2x Long Nvidia ETF,

which offers investors double the daily return on Nvidia ( NVDA )

, rose 177% in 2024, attracting more than $3.5 billion

in new assets during the year to bring total assets to nearly $6

billion.

"There's no reason to think that $1 trillion isn't the new

normal for inflows," said David Mann, global head of ETF product

and capital markets at Franklin Templeton, who is marking his

22nd year developing new exchange-traded funds. "This has been a

one-way train ride, and now the train is on the express track."