ETFs as tools for innovation

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 ” ETFs as Tools for Innovation”, Dave Gedeon (CEO, Bloomberg Index Services Limited) moderated a discussion with Jay Jacobs (Managing Director – U.S. Head of Thematic & Active ETFs, BlackRock), Will Rhind (GraniteShares) and Mike Venuto (Chief Investment Officer, Tidal). Together, they explained how ETFs are unleashing a new wave of innovative solutions that empower investors to harness the potential of ETFs to generate returns in entirely new ways.

What factors have driven the rapid growth and diversification of ETFs in the marketplace, and how did we reach the point where complex and niche ETF products have become so normalized?

Regulatory changes have been a key driver behind the rise of products like single-stock leveraged ETFs, which were conceptually viable for decades but only became feasible after the ETF and derivatives rules established the necessary legal framework.

Cultural shifts triggered by COVID also played a significant role, as the pandemic “gamified” investing. Many individuals adopted a mix of broad, passive strategies—what some call “VTI and chill”—alongside smaller allocations to more speculative investments. “People prefer to speculate within their brokerage accounts rather than on DraftKings,” says Venuto.

In many ways, the ETF wrapper has proven to be a game-changing technology, creating a transformative structure that allows a wide range of assets to be efficiently packaged and traded. Over time, the scope of investments within ETFs has expanded, driven by regulatory and technological advancements.

Should we expect this level of innovation to persist given the state of the market?

This trend is set to accelerate as more individuals take control of their finances. The rise of fintech platforms has simplified market access, making investing more approachable and fostering diverse investor mindsets. The “one-size fits all” approach is obsolete, as some investors now prioritize high returns over short periods (e.g., 10% in a day), in contrast with the conventional focus on steady, long-term growth (e.g., 10% in a year).

Still, core ETFs will continue to dominate the market as investors rely on them to build solid portfolio foundations. At the same time, clients are seeking complementary strategies to enhance returns. “It’s a bit like hot sauce—some prefer it mild, while others want it extreme,” says Jacobs. Investors are turning to factor-based strategies to leverage historically rewarded tilts for outperformance, thematic investing to capitalize on emerging trends, and active portfolio managers to generate alpha. While innovative strategies often capture headlines, they are seen as a complement to core holdings rather than a replacement.

How are investor behaviors evolving in terms of holding periods and use cases for products targeting high, short-term returns? How are clients’ concerns addressed given past controversies?

Similar to major U.S. stocks, most trading activity comes from institutional investors such as proprietary trading firms, hedge funds, and algorithmic traders. Beyond high-frequency trading, however, individual investors who are passionate about trading drive a significant portion of the activity, often discussing it on platforms like Reddit. “We have a fund family called YieldMax, and there are like six Facebook groups with thousands of people talking about it,” says Venuto.

ETFs, particularly Bitcoin ETFs, have gained traction as investors become more familiar with how digital assets fit into portfolios through ETFs. Despite concerns about market volatility, including the impact of factors like Trump tweets, a fund that meets its objective—such as providing a multiple of returns relative to an underlying stock—should withstand a downturn just as effectively as a stock like Nvidia.

The key to an ETF’s functionality remains the liquidity of its underlying asset. Regulatory changes have shifted single-stock products from passive to active. These products are not guaranteed to meet performance expectations daily, making clear disclosure essential. As they rely on institutional activity for liquidity, attempting to force unsuitable assets in an ETF can lead to failure, with market makers struggling to maintain liquidity.

Looking at the current mania, especially with the crypto space and meme coins taking off, where are the opportunities moving forward as regulations evolve?

While the Bitcoin ETF landscape has exceeded $100 billion in assets over the past year, the industry is still in its early stages. Innovation in the crypto space goes beyond creating new products—it extends to distribution, portfolio management, and client engagement, particularly in appealing to the next generation of investors. Despite some Bitcoin exposure among financial advisors and institutions, the focus remains on driving further adoption of both Bitcoin and Ethereum.

The regulatory environment is improving, with markets like NASDAQ showing increased support, which benefits smaller asset managers working to meet rising investor demand. According to Venuto, “14 of the 20 fastest-growing ETFs are related to crypto,” adding that many clients seek innovative ways to combine crypto with traditional assets, such as Bitcoin and gold.

ETFs’ appeal lies in their ability to simplify and package complex strategies, such as leveraged or options trades, into a single, easy-to-trade ticker. This approach suggests that investors are increasingly interested in bundled solutions. “It’s our scale being passed on in the package trades that we can see from social media. We just make it easier and more tax efficient for them in the best wrapper in the world,” says Rhind.

How would a decline in top-line equity returns impact the overall opportunity set for new products given that equity performance has driven much of the innovation over the last few years?

In a market driven by broad trends, or “beta-driven rallies,” investing can appear straightforward, with good results achieved by allocating to beta-tracking products. However, in more volatile markets, investors tend to become more strategic, often turning to specialized solutions like thematic, buy-write, and alpha-seeking strategies to generate return. “History shows that during downturns, money tends to flow out of mutual funds, only to flow back to ETFs during rebounds, as market disruptions trigger innovation,” says Jacobs. With factors such as high valuations, volatility, aging populations, and higher interest rates likely to weigh on portfolio returns, creativity and adaptability will be essential for future success.

Diversification remains a critical focus. “A focus on diversification has been lost in the pursuit of easy returns, as evidenced by strategies like “VTI and chill,” says Rhind. Meanwhile, the growing popularity of options-based income strategies like covered calls highlights the increasing dividend income generated by ETFs. These strategies have become more attractive for investors who, like the baby boomer generation, prioritize income over capital growth.