ETFs Went Bananas in 2024

U.S. ETFs broke everything in 2024. We saw record-high flows and new launches. AUM crossed the $10 trillion threshold. Crypto burst onto the scene. Active management exploded in popularity. Leveraged single-stock ETFs captured a shocking level of flows, and the ones focused on MicroStrategy actually stopped functioning properly. An ETF that profits off the volatility of an erstwhile software company that has become a leveraged play on Bitcoin? Peak 2024.

While the growth came primarily from the usual suspects—cheap beta and a handful of tactical products—newer and often riskier products captured a sizeable chunk of flows and an oversized portion of headlines. The result: overwhelm and confusion for investors and their advisors.

Meanwhile, fee compression accelerated, except where it reversed, creating additional confusion for asset managers.

I’m still trying to make sense of it. ETF nerd that I am, I will start with an analytical dive into the full dataset. But 2024 was too crazy to capture in charts alone. Conveying the zeitgeist requires some discussion about the top 10 ETFs in each asset class.

Record Industry Growth

In 2024, investors poured $1.12 trillion into U.S. ETFs, pushing AUM up to $10.4 trillion. It was the first time that flows reached the trillions.

The chart below contextualizes industry asset levels (orange boxes) in light of AUM growth rates (blue bars) and organic growth rates, i.e. flow rates (green bars). Of course, ETF AUM growth is largely a function of market performance, though flows certainly contribute.

ETF growth has been both fast and steady, a tribute to the utility and flexibility of the ETF wrapper.

As shown in the chart below, 2024 was a banner year for ETF launches as 757 new ETFs hit the marketplace and drove the fund count to 3,934. The closure rate hovered at the low end of normal.

No matter how you measure—by number of ETFs, flows, or AUM—the U.S. ETF industry is hot.

2024 U.S. ETF Flows

The largest asset classes of equity and fixed income also had a record year, and it was also the year that currency ETFs hit the charts. (FactSet classifies crypto in the currency asset class.)

Equity flows reached their highest-ever dollar level but ceded flows share to fixed income and currency as investors continued to gain comfort with bond ETFs and as cryptocurrency ETFs received SEC approval. And just like that, currency ETFs drew over $38 billion, or 3.4%, of all 2024 flows. That’s a substantial jump compared to the $1.5 billion in total currency ETF flows between 2016 to 2023.

Note: Throughout this article, flows values exclude assets converted from other funds.

Fixed income ETFs captured 26% of the full-year flows while representing less than 19% of the assets at the start of the year. All else equal, we would have expected bond ETFs’ overall market share to tick up, but strong equity markets were a countervailing force.

Flows Analysis by Strategy Group

ETF competition operates on multiple levels, both among and within asset classes, geographies, categories, and specific market segments, which are FactSet’s basic competitive units. With the growing interest in active management, it’s useful to look at investor interest within each segment through the lens of investment strategy.

FactSet Funds defines four general types of investment strategies.

• Plain vanilla aims to replicate a swath of the market, broad or narrow.

• Strategic, sometimes tagged as “smart beta”, uses academically grounded research elements to select and/or weight securities. Strategics include value, growth, dividends, fundamental, and factor investing.

• Idiosyncratic ETFs share the complexity of strategics but lack the academic rigor. They can be simple equal weighting, single-exchange selection, or ESG, which aims to correct for economic externalities.

• And then there’s active, in which humans select and weight the portfolio securities.

In 2024, active took in significantly more flows than its initial market share suggested. The difference is called the flows gap. The chart below depicts the aggregate flows gap in both the equity and fixed income asset classes, on a percentage basis.

Translated into dollars, active equity ETFs pulled in $145 billion, which is $114 billion more than its starting market share would have predicted. Active bond ETFs drew $110 billion, an excess of $16 billion.

The magnitude of active management’s momentum in the ETF industry becomes clear in the following series of charts, which illustrate equity and bond ETF flows and AUM in each of the strategy groups.

Strong flows into active equity ETFs pushed its relative market share higher, to 6%.

While active equity AUM has grown steadily by gaining about 1% of equity ETF market share per year, active fixed income grew at an astonishing pace. Active bond ETFs captured 37% of flows, which is more than twice their 2023 share.

As a result, active captured an additional 4% of bond ETF AUM, jumping from 12% to 16% in 2024.

Active flows and AUM hit new absolute highs in 2024 in both equity and fixed income. This was also true on a percentage basis for fixed income, but not in equity. Active equity ETFs captured 19.2% of all equity flows; in 2023 that number was 20.0%. Idiosyncratic and Strategic funds both benefitted but in varying proportions. The chart below shows the history.

A similar chart for bond ETFs would be quite dull, as only vanilla and active management are serious competitors. Most years vanilla captured 75%-85% of bond ETF flows, until the breakout year of 2024.

Fee Compression Update

The change in investor preferences has scrambled the cost profile of the ETF industry. Actively managed ETFs cost more than passives. They are also significantly more expensive than the plain vanilla ETFs that dominate the flows and AUM charts. As a result, the asset-weighted average cost of U.S. ETFs rose in 2024, after decades of steady decline.

Quibblers might point out that last year’s rise amounted to 0.003%, or 3/10 of a basis point. Yet that tiny move pushed the industry expense ratio back to a level last seen in early 2022.

Fee Analysis by Asset Class

But that’s just the biggest big picture. It turns out that each asset class has a different trajectory. Equity ETF fees continued to drop; the industry top-line increase is attributable to fixed income.

One thing is clear: The 0.005% jump in the bond ETF category average cost resulted from active management (0.36%/year expense ratio, asset weighted) increasing its market share by 4.4% year over year, dampening the compressive influence of vanilla bond funds (expenses averaging 0.10% / year).

In contrast, active equity ETFs gained just 1.4% of market share among equity funds. Even though the cost differential is nearly identical to fixed income, at 0.37% and 0.11%, the smaller shift in market share mitigated the effect of investors’ taste for a pricier strategy.

Fee Trends Among Direct Competitors

Diving a level deeper to analyze investor choices among direct competitors—ETFs that share a market segment and an investment strategy, such as Avantis International Small Cap Value ETF (AVDV) and Dimensional International Small Cap Value ETF (DISV)—shows that passive and active equity investors have recently diverged.

Among passive equity investors in 2024, 90% favored cheaper products and opted for the less expensive options among vanilla and strategic ETFs. Yet active ETF investors selected higher-priced options. As the chart below illustrates, this is a reversal of a long-standing trend.

Or is it?

The reversal came about because of mutual funds or SMAs that adopted the ETF wrapper, known as ETF conversions. 2024’s crop of converted ETFs pushed the overall expense ratio for active equity ETFs up by 0.005%.

It wasn’t always thus. Between 2021 and 2023, newly converted active equity ETFs carried an asset-weighted average expense ratio between 26 and 29 basis points, significantly lower than their peers. The initial ETF conversions contributed to the steep drop shown in the chart above.

This year’s conversions are different. They carry an asset-weighted average expense ratio of 65 basis points, nearly double the 37-basis point cost of their actively managed competitors.

Excluding conversions leaves the active equity expense ratio trend flat, which is a surprise given the history of fee compression.

New in 2024: Champagne Taste in Active Equity

It turns out that 2024 really was different, because in competitive contests investors chose higher-priced active equity funds. The chart below shows the gap.

Actively managed equity ETFs that gained market share cost 41 basis points, on average, while those that lost market share cost just 34. It’s hard to believe, but there it is.

We can see an example in the U.S. Large Cap Value segment, between JPMorgan and Dimensional.

Investors who opted for JAVA over DFLV paid a 100% premium.

Fixed income ETF investors, it should be noted, continued to drive fees downward, at least as viewed through the lens of competition among peers.

That yawning fee gap between the bond ETFs that garnered excess flows compared to their market caps and those that lagged behind is fully in line with recent trends. It’s a good reminder that the price insensitivity in active equity ETFs is anomalous, at least for now.

ETF Issuers: Shifting Fortunes

Price insensitivity regarding investment strategy and among active ETFs played out in issuer preferences as firms like Invesco, JP Morgan, and Fidelity captured excess flows in comparison to their market share. Conversely, low-cost providers Blackrock, Vanguard, State Street, and Schwab lost a bit of ground.

In Other News, It’s Chaotic Out There

Bird’s-eye views on industry growth and investor cost preferences are very helpful for understanding the recent state of the ETF industry, but they don’t tell the whole story. For that, we need to shift perspective and take a lightning round look at the most popular ETFs within the equity, fixed income, currency, and geared asset classes.

Equity first. Here are the top 10 ETFs, by flows, in 2024.

Cheap and broad vanilla ETFs remained at the top of the charts, interspersed with pricier tactical plays like QQQ and RSP plus State Street and Invesco’s cannibal products SPLG and QQQM. VOO and IVV had their best years ever, as shown in the flows history below.

Say what you will about actives and crypto. Cheap core beta thrives on.

The ETF in the number 10 position, iShares U.S. Equity Factor Rotation Active ETF (DYNF) rose to its spot not by virtue of utility but by decree: BlackRock added DYNF to its model portfolios last spring.

The big flow spikes in January and April marked initial and subsequent additions to the ETF portfolios that BlackRock manages. DYNF’s presence in the top 10 equity list reminds us of the growing influence of model ETF portfolio managers.

DYNF is everything that VOO is not: actively managed, taking moderately concentrated bets against the market, and looking to ride factor trends. Plus, DYNF costs nine times more than VOO. It’s a specialty product, right there in the top 10 equity ETFs.

As for bonds, on a flow basis the top 10 fixed income ETFs in the chart below are similarly dominated by cheap vanilla core holdings with AGG, BND, and cash-like SGOV in the top three. But after that comes a doozy: number four Janus Detroit Street Trust Janus Henderson AAA CLO ETF (JAAA), followed by number five actively managed FBND. Their lead over stalwarts BNDX, VCIT, and MUB make it clear how actively managed, higher priced, potentially riskier bond ETFs displaced their vanilla brethren in 2024.

To state the obvious, JAAA offers actively managed collateralized loan obligations. Someone out there has an appetite for risk. I hope they’re old enough to remember 2008.

New Life in Currency ETFs

Currency ETFs were dormant until the SEC approved spot crypto ETFs, which occupied slots one through 14 on the currency ETF league table last year. Crypto, crypto, crypto. Risky, risky, risky.

Grayscale, the firm whose lawsuit forced the SEC’s hand on spot bitcoin approval, lost $25 billion in outflows as investors rejected GBTS’s 150 and ETHE’s 250 basis point expense ratio. iShares Bitcoin Trust ETF (IBIT), which costs just 12 basis points, was the big winner by raking in $52 billion in 2024.

Model Portfolios, CLOs, and crypto collectively made a huge showing in 2024. But some investors went looking for even more risk in the realm of leveraged and inverse ETFs, jointly called geared funds.

The top 10 geared ETF slots mainly went to leveraged single stock and cryptocurrency ETFs. GraniteShares 2x Long NVDA Daily ETF (NVDL), the 65^th most popular ETF overall, magnified the daily returns of white-hot Nvidia. Geared ETFs are designed for ultra-short holding periods, as they deliver their multiple on a daily basis only.

NVDL’s growing asset base suggests that some investors are holding it for far longer. The individuals who invested early in the year and held on until the fall did well but endured some extreme volatility. If they bought in July, they had an even rougher go of it. Here’s NVDL’s 2024 daily returns.

At least NVDL delivered on its promise of 2x Nvidia’s daily return.

Geared ETF number four Defiance Daily Target 2x Long MSTR ETF (MSTX)'s and number eight T-Rex 2X Long MSTR Daily Target ETF (MSTU)’s actual daily returns ratios deviated substantially from the 200% target when the funds grew too large for the swaps market and had to improvise with listed options.

The banks who write swaps had plenty of reasons to be nervous: the underlying equity, MicroStrategy, has borrowed extensively to invest in bitcoin, such that its stock price reflects a leveraged version of bitcoin’s returns.

Would you want to write a swap against twice the returns of MSTR, depicted above in green? Exactly.

MSTX and MSTU seem like candidates to represent peak 2024, but in my book that honor goes to a related ETF. YieldMax MSTR Option Income Strategy ETF (MSTY) writes covered calls on MicroStrategy and attracted $1.8 billion in flows since it launched in February 2024.

Yep, an ETF that combines an options strategy with exposure to a single company, which itself is a leveraged play on Bitcoin. MSTY’s holders may be selling calls to MSTX and MSTU.

As MicroStrategy makes its way into indexes and ETFs, investors who scrupulously avoided uncompensated risks by holding big, broad, market-cap weighted ETFs like iShares Core S&P Total U.S. Stock Market ETF (ITOT) suddenly find themselves exposed to a sliver of bitcoin. That’s just so 2024.

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