Leading through change: Developing ETF solutions in an evolving market

Held as ETF assets have breached $10 trillion and passed $1 trillion annual inflow milestone, ETFs in Depth – Bloomberg’s flagship event devoted to this rising asset class – convened leading ETF issuers, market makers, pundits, and enthusiasts to discuss the important issues facing the industry today.

In a session titled ” Leading Through Change: Developing ETF Solutions in an Evolving Market,” Bloomberg’s Vildana Hajric moderated a discussion with David Abner (Head of Global ETFs and Funds, Northern Trust Asset Management), Philip McInnis (VP- Director of Investments, Avantis Investors) and Anna Paglia (Executive VP & Chief Business Officer, State Street Global Advisors). Together, they explored the evolving ETF landscape, where innovations are poised to further accelerate growth as more investors recognize the transformative potential of ETFs.

As new ETF solutions drive an evolving market, what are some of the key changes shaping the industry?

Change has defined the ETF industry since its inception—a time when many believed electronic trading would render traditional roles obsolete. Instead, the industry has flourished, reaching a record $1 trillion in ETF inflows last year, with adoption exceeding expectations and accelerating rapidly. ‘I feel the industry is just reaching a pivotal hockey stick moment that will create exciting opportunities for the next 20 years,’ says Abner.

ETFs are akin to technology, which is why adaptability to change has become a defining characteristic of the industry and its professionals. This is evident in the expansion of ETFs to an ever-growing range of asset classes, which now includes everything from bonds to Bitcoin. It is also reflected in the increasingly diverse investor base, which has grown from institutional investors to wealth managers. As ETFs push new frontiers, they continue to democratize access to investments. ‘If you don’t like change, you’ll like irrelevance even less,’ says Paglia.

What factors have driven the changes in ETF adoption and investment strategies over the last few years?       

The inflection point for ETFs came five years ago, with a shift toward educating advisors and investors about their roles in portfolios, especially transparent active ETFs. A significant focus was on comparing ETFs to mutual funds and index-based ETFs, with external factors like commission-free ETF trading acting as a catalyst for broader adoption among wealth managers and advisors.

While active ETFs share similarities with index ETFs in technology, they offer additional flexibility in managing exposure. However, education remains essential to help stakeholders understand the mechanics and terminology.

Investors are increasingly concerned about market concentration at the top, particularly with unrealized gains in major indices like the S&P 500. This has led many to explore alternative strategies, such as small-cap or international investments, which may offer better valuation opportunities.

In this context, the emphasis should be on building long-term, diversified allocations suited for decades, rather than making drastic wholesale changes. Revisiting assumptions behind asset allocation—such as goals and risk considerations—is crucial, especially in concentrated markets. “This is especially urgent for retail investors who may believe that investing is easy after enjoying strong returns by putting money in indices like the S&P 500,” says McInnis.

As the industry shifts from focusing on niche sectors to creating well-rounded portfolios that ensure income generation and provide beta exposure, it is also under pressure to offer investors the necessary tools to manage their investments. “Individuals, whether teachers or investment professionals, deserve a fair and easy-to-understand investment experience. They shouldn’t have to make a second career out of managing their money,” says Abner.

What are the key growth opportunities for firms looking to meet evolving client demands and enhance efficiency in the coming year?

The era of launching new products and hoping for the best is over. “Clients aren’t looking for a shiny new toy; they want solutions to their problems,” says Paglia. Firms must adopt a client-first approach, addressing needs such as reducing volatility or concentration risk, and delivering tools tailored to those objectives. Value lies not only in the products themselves but in the services and support surrounding them. As clients consolidate providers, the goal is to become the go-to partner by offering not just products, but also actionable data, thought leadership, and expertise in emerging strategies.

A prime example of evolving client needs is the push to include ETFs in 401(k) plans. While ETFs are akin to mutual funds—a staple of 401(k)s—technological barriers currently prevent their inclusion. “The enemy of efficiency is fragmentation,” notes Abner, describing efforts to enable retirement accounts to purchase ETFs directly to reduce costs and enhance tax efficiency for retirement savers.

“While I personally enjoy ‘hot sauce’, our approach to portfolios is mostly ‘plain vanilla,’” says Eric Balchunas, Senior ETF Analyst, Bloomberg, emphasizing that successful portfolios are built on asset allocation. This means the effectiveness of a product depends on the end user’s needs and application. For instance, investors with full discretion over their portfolio may find that traditional strategies can deliver results comparable to newer, packaged investment solutions. Although many advisors are diversifying into alternatives like private equity, traditional long-only equity and fixed income remain the backbone of most portfolios as they offer significant potential for value creation despite being overshadowed by more exotic strategies.

What are some of the current challenges faced by the industry? How are these impacting firms as they seek to navigate these changes?

The industry is bifurcating as not every firm can be “everything to everyone.” Success often lies in focusing on core strengths and excelling in specific areas. Large firms are expanding their offerings to include more active and core products, particularly in fixed income, which is poised for significant growth. Meanwhile, smaller niche players increasingly focus on specialization, testing new themes and innovative concepts. Strategic partnerships enable firms to combine their best-in-class capabilities with those of others to meet client needs effectively.

Despite concerns about market saturation, innovation and new ideas continue to drive growth in the ETF space. Institutional investors increasingly view ETFs as more than just tactical or transitional tools, recognizing their structural advantages over mutual funds. ETFs, by contrast, provide economies of scale and cost-effectiveness while insulating investors from the actions of others. “You buy in, you pay your way, and once you’re there, what others do doesn’t impact your exposure,” says McInnis.