ETFs May Face Hurdles in Rapid Growth by 2025

Forex - After a record inflow of $1.1 trillion in 2024, U.S. exchange-traded funds (ETFs) may face more challenges to their rapid growth in 2025. Inflows reached the highest level in the product's 35-year history, nearly doubling last year's figure of $597 billion.

Analysts attribute the popularity of these products to a combination of factors in the bull market in the U.S., where ETFs hold a significant share, the emergence of innovative cryptocurrency and options-based products, and investors' preference for lower-cost, liquid ETFs over mutual funds.

As many believe that ETFs will break the records of 2024 in 2025, they are cautiously examining a range of new challenges, from navigating the increasingly crowded ETF arena to the ever-present question of innovation.

Morningstar's ETF analyst Bryan Armour noted, "I think the development of new products may have outpaced investor interest in some of the more complex strategies. Not every product will capture investors' interest."

Indeed, one of Armour's forecasts for 2025 is that a record number of ETFs will shut down. Asset managers closed 186 funds in 2024, with 91% of them having less than $250 million in assets, and Armour expects this number to exceed the record of 253 set in 2023.

Armour stated, "Too many products were developed, and many ETFs may not reach profitability because they lack something unique and appealing enough to attract assets." According to Cerulli Research, 2023 marked the first year that the average lifespan of an ETF decreased, with this duration already falling below five years by early 2024.