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ETF

An exchange-traded fund (ETF) is a type of investment company registered with the U.S. Securities and Exchange Commission (SEC) as an open-end fund or unit investment trust, which pools investor capital to purchase a diversified basket of assets such as stocks, bonds, or commodities and issues shares that trade intraday on stock exchanges at market-determined prices, akin to individual securities.^[1]^[2] Unlike traditional mutual funds, which are priced once daily at net asset value, ETFs enable continuous trading, real-time pricing, and creation/redemption mechanisms involving authorized participants to minimize deviations from underlying value.^[3] The first U.S.-listed ETF, the SPDR S&P 500 ETF Trust (SPY), launched in January 1993 by State Street Global Advisors, tracking the S&P 500 index and revolutionizing access to passive indexing through exchange liquidity.^[4] This innovation spurred explosive growth, driven by structural advantages including broad diversification across asset classes, lower expense ratios compared to actively managed funds (often under 0.20% annually), high liquidity via secondary market trading, and tax efficiency from in-kind redemptions that defer capital gains.^[5]^[6] By September 2025, global ETF assets under management reached a record $18.81 trillion, with U.S. ETFs alone surpassing $12 trillion, reflecting their dominance in retail and institutional portfolios for cost-effective beta exposure.^[7]^[8] ETFs encompass passive index trackers, active strategies, leveraged/inverse variants, and thematic funds targeting sectors like technology or commodities, but they carry inherent risks including tracking errors, premium/discount volatility to net asset value during market stress, and amplified losses in leveraged products due to daily resetting and compounding effects unsuitable for long-term holding.^[9]^[10] Regulatory scrutiny has intensified around liquidity mismatches and systemic implications, as seen in events like the 2010 Flash Crash where ETF trading exacerbated temporary dislocations, underscoring the need for robust market-making and investor awareness of non-diversifiable counterparty and operational hazards.^[11]

History

Origins in the 1990s

The conceptual foundations of exchange-traded funds (ETFs) emerged in the late 1980s amid efforts to create tradable instruments mimicking broad market indices. In 1989, Index Participation Shares (IPS), a proxy for the S&P 500, began trading on the American Stock Exchange and Philadelphia Stock Exchange, offering investors exposure to index performance through exchange-listed units; however, U.S. regulators curtailed these due to their resemblance to futures contracts, limiting their longevity.^[12]^[13] Similarly, in 1990, the Toronto Index Participation Shares (TIPS), tracking the Toronto 35 Index, launched on the Toronto Stock Exchange as the first exchange-traded index-linked product, providing a model for intraday liquidity tied to diversified equity benchmarks.^[14] These precursors addressed the demand for vehicles combining index replication with stock-like tradability, though regulatory and structural hurdles prevented widespread adoption in the U.S.^[15] The first U.S.-listed ETF, the SPDR S&P 500 ETF Trust (SPY), debuted on January 22, 1993, under State Street Global Advisors on the American Stock Exchange.^[4]^[16] SPY tracked the S&P 500 Index by holding a portfolio of its constituent stocks, enabling investors to buy and sell shares throughout the trading day at market-determined prices, unlike traditional mutual funds valued only at end-of-day net asset value (NAV).^[4] This innovation blended the diversification benefits of passive index investing—bolstered by the efficient market hypothesis's emphasis on broad-market replication since the 1970s—with the flexibility of individual stock trading, reducing costs and timing constraints for retail and institutional participants.^[13]^[17] ETFs' origins responded to the limitations of mutual funds, which, despite their rise in popularity for low-cost indexing, restricted transactions to once-daily pricing and often imposed higher fees or redemption delays.^[13] By structuring SPY as a unit investment trust with in-kind creation and redemption mechanisms, State Street facilitated continuous liquidity and minimized capital gains distributions, aligning with first-mover advantages in a market increasingly favoring passive strategies over active management.^[4] Initial trading volumes for SPY were modest but grew as it democratized access to S&P 500 exposure, setting the stage for ETFs as a hybrid instrument prioritizing empirical efficiency in cost and execution over discretionary fund selection.^[18]

Growth through the 2000s and 2010s

The expansion of exchange-traded funds during the 2000s and 2010s was marked by rapid growth in assets under management, driven by diversification into new asset classes and broader investor adoption. Global exchange-traded product assets grew at over 30% annually from 2000 to 2010, reflecting increasing appeal amid favorable market conditions and product innovation.^[19] This period saw the introduction of commodity-linked ETFs, beginning with products tracking gold and oil in the mid-2000s, which captured investor interest in alternative assets amid rising commodity prices.^[13] Similarly, international ETFs proliferated, with Europe launching its first listings in 2000 and subsequent expansion into emerging markets, enabling easier access to non-U.S. equities and bonds.^[20] By the late 2010s, global ETF assets exceeded $5 trillion, underscoring the shift from niche indexing tools to mainstream investment vehicles.^[21] The 2008 financial crisis served as a critical test of ETF structures, demonstrating their relative resilience compared to open-end mutual funds, which faced massive redemptions and liquidity strains. ETFs maintained trading functionality through their in-kind creation and redemption processes, avoiding the fire-sale dynamics that plagued some traditional funds, though certain fixed-income and leveraged products experienced temporary deviations from net asset value.^[22] Post-crisis regulatory scrutiny and investor caution spurred growth in fixed-income and sector-specific ETFs, as demand rose for transparent, low-cost exposure to bonds and defensive industries during recovery phases.^[13] This era also highlighted ETFs' appeal in volatile environments, with assets rebounding swiftly due to their intraday liquidity and reduced sensitivity to forced selling. Key empirical drivers included persistently lower expense ratios for ETFs versus actively managed mutual funds, averaging 0.2% to 0.5% for many equity index products in the 2010s, compared to over 1% for the latter in the early 2000s before declines.^[23] ^[24] Institutional investors adopted ETFs for efficient portfolio construction and rebalancing, while retail participation surged through discount brokerages, with U.S. household ETF ownership expanding nearly 17-fold from 2005 onward.^[25] Inclusion in defined-contribution plans like 401(ks remained limited—offered in only about 13% of plans by 2019—but grew steadily among smaller employers seeking cost efficiencies.^[26] These factors, combined with globalization via cross-listed products, propelled ETFs' integration into diverse portfolios worldwide.^[27]

Expansion and innovations since 2020

Since 2020, the global exchange-traded fund (ETF) industry has experienced accelerated growth, with assets under management reaching a record $18.81 trillion by the end of September 2025, driven by sustained net inflows and new product launches.^[7] Actively managed ETFs alone attracted record net inflows of $374.3 billion in 2024, reflecting investor demand for strategies beyond traditional passive indexing.^[28] In the first nine months of 2025, 794 new ETFs were launched in the U.S., surpassing prior yearly records and expanding offerings in equity, fixed income, and alternatives.^[29] Key innovations include the U.S. Securities and Exchange Commission's approval of spot Bitcoin exchange-traded products on January 10, 2024, which enabled direct exposure to cryptocurrency prices without futures contracts, attracting billions in inflows and broadening ETF appeal to digital assets.^[30] Active ETFs have proliferated, with global assets exceeding $1.4 trillion by mid-2025 and comprising nearly 30% of net inflows, as issuers leverage intraday trading and tax efficiencies to compete with mutual funds.^[31] Thematic ETFs, targeting sectors like technology disruption or commodities, have also surged, though subsets such as environmental, social, and governance (ESG) funds have empirically underperformed benchmarks in studies of U.S. and Hong Kong markets, often due to higher costs and restrictive screening that excludes high-return stocks.^[32]^[33] This expansion stems from post-pandemic economic recovery, including fiscal stimulus and initially low interest rates that boosted liquidity, alongside a retail trading surge facilitated by commission-free platforms like Robinhood, which increased individual investor participation in ETFs from 2020 onward.^[34]^[35] Policy shifts, such as regulatory easing for innovative products, further catalyzed diversification, though rapid launches raise concerns over liquidity in niche funds.^[36]

Structure and mechanics

Creation and redemption process

The creation and redemption process for exchange-traded funds (ETFs) involves authorized participants (APs), which are typically large financial institutions such as broker-dealers that enter into legal agreements with ETF issuers to create or redeem ETF shares in large blocks known as creation units, often comprising 25,000 to 100,000 shares or more depending on the fund.^[37]^[38] This primary market mechanism occurs directly between APs and the ETF provider, distinct from secondary market trading on exchanges, and enables the issuance or withdrawal of shares without the fund needing to buy or sell underlying assets in the open market.^[39] In the creation process, an AP assembles a basket of securities that mirrors the ETF's portfolio holdings—proportional to the creation unit size—along with any necessary cash component to account for dividends or transaction costs, and delivers this in-kind package to the ETF issuer in exchange for newly minted ETF shares at the net asset value (NAV).^[37]^[40] This in-kind exchange allows the ETF to acquire underlying assets efficiently without injecting cash that could dilute returns or incur brokerage fees.^[39] Conversely, redemption reverses this flow: an AP delivers ETF shares to the issuer, which then transfers the corresponding basket of underlying securities back to the AP, again primarily in-kind, minus any cash adjustments.^[41]^[37] This mechanism minimizes the ETF's exposure to market impact from forced sales and avoids realizing capital gains within the fund, as the securities exchanged are often low-basis holdings that would trigger taxes if sold for cash.^[39]^[42] The process underpins ETF price discipline through arbitrage: if the ETF's market price trades at a premium to its NAV, APs can profit by creating new shares via the underlying basket (bought at lower cost) and selling them in the secondary market; if at a discount, APs redeem shares for the basket and sell the securities, pushing the price toward NAV.^[37]^[43] This daily, incentive-driven intervention by APs—facilitated by their access to both markets—ensures tight tracking, with deviations typically limited to fractions of a percent absent market disruptions.^[38]^[44] Compared to open-end mutual funds, which predominantly handle redemptions in cash—potentially forcing asset sales that realize gains and distribute taxes to all shareholders—the ETF's in-kind structure causally reduces internal transaction costs and tax events, as the fund can offload appreciated securities to redeeming APs without a taxable sale.^[45]^[46] While mutual funds can use in-kind redemptions under certain rules, ETFs employ this method far more routinely due to the standardized AP framework, enhancing structural efficiency.^[47]^[48]

Authorized participants and liquidity provision

Authorized participants (APs) are large financial institutions, such as banks including J.P. Morgan, Goldman Sachs, and Bank of America, that contract with ETF issuers or distributors to create and redeem ETF shares in large blocks known as creation units.^[49]^[50]^[38] These entities assemble or deliver baskets of underlying securities matching the ETF's holdings in exchange for ETF shares, or vice versa, facilitating primary market transactions that occur off-exchange and directly with the fund.^[51] By enabling this arbitrage mechanism, APs ensure the ETF's market price remains closely aligned with its net asset value (NAV), thereby providing foundational liquidity independent of secondary market trading by retail or institutional investors.^[52] In the secondary market, where ETF shares trade like stocks on exchanges, liquidity—manifested in tight bid-ask spreads and depth—is sustained by the primary market activities of APs, who monitor deviations and execute creations or redemptions to supply or absorb shares as needed.^[53] APs often collaborate with market makers, who quote prices intraday; when premiums or discounts emerge, APs hedge positions by trading ETF shares and underlying securities, injecting volume that supports efficient pricing.^[50] Empirical evidence shows this dynamic results in ETF average daily trading volumes frequently surpassing those of equivalent underlying asset baskets, as AP hedging and arbitrage trades—such as shorting overpriced ETFs while buying underlyings—generate additional turnover beyond end-investor demand.^[54] For instance, in 2024, just three firms—Bank of America, Goldman Sachs, and J.P. Morgan—handled over half of all ETF creations and redemptions, underscoring their concentrated role in volume generation.^[38] Under normal market conditions, AP participation prevents significant decoupling between ETF prices and underlying values by enabling scalable share issuance or withdrawal, which dampens volatility from secondary market imbalances.^[52] However, during periods of acute stress, such as the August 24, 2015, flash crash triggered by global equity declines, AP engagement can strain as widened underlying bid-ask spreads and execution risks deter arbitrage, leading to temporary liquidity evaporation and ETF price dislocations before stabilization.^[55]^[56] In that event, many ETFs halted trading due to extreme volatility, with APs and market makers withdrawing quotes amid uncertainty over underlying valuations, highlighting limits to the mechanism's resilience absent regulatory backstops like circuit breakers.^[56]

Tracking methods and index replication

Physical replication entails the ETF acquiring the actual securities comprising the benchmark index, either through full replication—holding all constituents in exact benchmark weights—or optimized (or stratified) sampling, which selects a subset of holdings designed to replicate key index attributes like sector exposure, market capitalization, and volatility while excluding illiquid or costly assets.^[57]^[58] Full replication minimizes deviation from the index but elevates transaction costs and operational complexity for expansive or fragmented benchmarks, such as those tracking thousands of small-cap stocks.^[59] Optimized sampling curtails these expenses and enhances liquidity management, though it risks minor discrepancies in performance due to the inherent approximations in portfolio construction.^[60] Synthetic replication diverges by utilizing over-the-counter derivatives, primarily total return swaps, wherein a counterparty agrees to deliver the index's return in exchange for a fee or collateralized assets, obviating the need to hold underlying securities and enabling precise exposure to restricted or inaccessible markets like certain emerging equities or commodities.^[61]^[62] This approach streamlines access to hard-to-replicate indices but embeds counterparty credit risk, as the ETF's returns hinge on the swap provider's solvency; post-2008 financial crisis reforms, including UCITS directives in Europe, imposed stringent collateral requirements and exposure caps at 10% of net asset value to curb systemic vulnerabilities exposed during the Lehman Brothers default.^[63]^[64] Tracking error, quantified as the annualized standard deviation of the ETF's excess returns relative to its benchmark, averages below 0.5% for prominent equity ETFs, with large-cap funds like those mirroring the S&P 500 registering as little as 0.02% annually over multi-year periods.^[65]^[66] Errors escalate in illiquid or emerging market funds, often exceeding 1% due to sampling constraints, rebalancing frictions, and dividend reinvestment lags, though physical full-replication strategies consistently outperform synthetics in fidelity, per empirical analyses of European and U.S. funds from 2000–2012.^[67]^[68] Synthetic methods, while efficient for precision in volatile assets, amplify error potential from swap resets and collateral mismatches, underscoring physical replication's preference in liquid developed markets for benchmark adherence.^[62]^[67]

Types and variations

Passive index-tracking ETFs

Passive index-tracking exchange-traded funds (ETFs) aim to replicate the performance of a specified benchmark index, such as the S&P 500, by constructing a portfolio that holds the constituent securities in proportions matching the index's weighting methodology, typically through full replication or sampling techniques. These ETFs minimize active management decisions, relying instead on the index's rules-based composition to achieve returns that closely track the benchmark before fees and expenses. The archetype for this structure is the SPDR S&P 500 ETF Trust (SPY), launched on January 22, 1993, by State Street Global Advisors, marking the debut of a U.S.-listed ETF and establishing the model for broad-market equity indexing.^[69] By mid-2025, passive index-tracking ETFs comprised the vast majority of the ETF industry's assets under management (AUM), accounting for approximately 91% of global ETF AUM, as active strategies represented only 9%.^[70] In the U.S. alone, passive ETFs numbered around 2,142 as of August 2025, reflecting expansion from SPY's singular launch to a diverse array tracking equity, fixed-income, and other indices worldwide.^[71] This dominance stems from their alignment with efficient market principles, where benchmark indices capture broad market returns without the costs and errors associated with security selection; empirical evidence from S&P Dow Jones Indices' SPIVA U.S. Scorecards consistently shows that, over 15-year horizons, 85% to 97% of active large-cap equity funds underperform the S&P 500, net of fees, underscoring indexing's advantage in capturing systematic returns while avoiding underperformance risks.^[72]^[73] The growth of passive ETFs has been driven by their low expense ratios—often below 0.10% annually for broad indices—compared to active funds' higher fees, enabling investors to retain more of the market's compounded returns over time.^[74] Historical data indicate that U.S. ETF AUM, predominantly passive, expanded from under $1 trillion in the early 2000s to over $12 trillion by August 2025, with passive strategies fueling the majority of inflows due to their verifiable tracking fidelity and cost efficiency.^[75] This structure privileges causal realism in portfolio construction, as deviations from index weights introduce unnecessary variance without reliable outperformance, a pattern reinforced by decades of SPIVA analyses across asset classes.^[76]

Active and smart beta ETFs

Active ETFs utilize portfolio manager discretion to select and weight securities, aiming to outperform benchmarks through security selection, sector allocation, or tactical adjustments rather than strictly replicating an index. Unlike passive strategies, these funds allow managers to respond to market conditions or exploit perceived inefficiencies, though empirical evidence indicates that the majority fail to deliver consistent alpha net of fees over extended periods. A prominent example is the ARK Innovation ETF (ARKK), launched in October 2014 and managed by Cathie Wood, which targets companies involved in disruptive innovation such as genomics, automation, and fintech, with at least 65% of assets in such equities under normal circumstances.^[77] As of the end of 2024, U.S. active ETFs held approximately $856 billion in assets under management (AUM), representing about 8% of total ETF AUM, with growth driven by structural advantages like intraday trading and tax efficiency.^[78]^[79] Smart beta ETFs, sometimes termed strategic or factor-based, apply transparent, rules-based methodologies to deviate from traditional market-cap weighting, tilting exposure toward empirically identified factors such as value, momentum, quality, or low volatility to capture potential risk premia or enhance risk-adjusted returns.^[80] These strategies blend passive implementation with active-like tilts, offering lower expense ratios—typically 0.20% to 0.50%—compared to traditional active mutual funds averaging over 0.80%.^[81] Empirical analyses of U.S. smart beta ETFs from 2009 to 2019 reveal mixed performance: while some factors like momentum delivered relative outperformance in bull markets, others like value lagged significantly during growth-dominated periods, with overall risk-adjusted returns often comparable to cap-weighted indices after costs and factor crowding effects.^[82] Critics argue that smart beta's reliance on historical factor premia overlooks data-mining biases and regime shifts, leading to inconsistent results rather than guaranteed superiority.^[83] In 2025, active and smart beta ETFs have captured a growing share of inflows, with active strategies accounting for about 37% of total ETF flows year-to-date through mid-year, fueled by launches in fixed income and alternatives amid volatile markets.^[75] This surge challenges passive dominance, as active ETF AUM expanded over five times faster than passive counterparts, reaching projections of over $1 trillion by year-end. However, long-term net returns for active ETFs continue to trail passive benchmarks on average, with only a minority sustaining outperformance due to higher fees eroding gains and the difficulty of persistent skill-based alpha generation in efficient markets.^[85] Smart beta variants have similarly faced scrutiny, as factor rotations—such as the 2020-2022 value underperformance—highlight vulnerabilities to economic cycles, underscoring that these approaches do not inherently overcome the empirical hurdle of beating market returns net of costs.

Leveraged, inverse, and thematic ETFs

Leveraged exchange-traded funds (ETFs) seek to deliver multiples, such as 2x or 3x, of the daily performance of an underlying index or benchmark, achieved primarily through derivatives including futures contracts, swap agreements, and options that amplify exposure.^[87] ^[88] Inverse ETFs, in contrast, aim to provide the opposite return, such as -1x or -2x, of the daily index performance, allowing investors to benefit from declines via similar derivative instruments without the mechanics of direct short selling or margin borrowing.^[87] ^[89] The first leveraged ETFs launched in the United States in 2006, following regulatory review, marking an expansion beyond standard index-tracking products.^[90] These funds reset their leverage daily to maintain the targeted multiple, which introduces compounding effects that cause returns to deviate from simple multiples over multi-day periods, particularly in volatile or range-bound markets—a phenomenon known as volatility decay or beta slippage.^[91] ^[92] Empirical analyses of leveraged ETFs in major markets like the U.S. and Japan demonstrate that this path-dependent erosion leads to underperformance relative to the underlying index's leveraged equivalent, with losses amplifying during oscillations rather than unidirectional trends.^[93] For inverse products, the same rebalancing mechanism exacerbates decay in non-declining environments, rendering long-term holds unsuitable as values erode even if the index remains flat.^[94] Consequently, leveraged and inverse ETFs are intended for short-term tactical applications by sophisticated investors, such as hedging or speculating on intraday or daily moves, rather than buy-and-hold strategies, where sustained exposure often results in principal loss independent of the index direction.^[87] ^[94] U.S. Securities and Exchange Commission guidance emphasizes their niche role, warning that daily objectives may not hold over extended periods due to these structural dynamics and associated costs from derivative rollovers.^[87] Thematic ETFs concentrate on specific trends or sectors, such as blockchain, cloud computing, or cryptocurrencies, selecting holdings aligned with forward-looking narratives like digital assets or technological disruption, often resulting in narrower diversification than broad-market funds.^[95] ^[96] Examples include crypto-themed funds tracking companies in mining or exchanges, which gained prominence after the SEC's approval of spot Bitcoin ETFs on January 10, 2024, spurring over $50 billion in inflows by mid-2024 and amplifying Bitcoin's price swings through increased institutional participation.^[30] ^[97] Some thematic variants integrate leverage or inverse elements to heighten sensitivity to theme-specific catalysts, offering potential for outsized gains in momentum-driven scenarios but magnifying drawdowns during reversals or lulls.^[98] These specialized structures provide utility for targeted exposure and contrarian positioning but carry elevated risks from concentration, derivative dependencies, and rebalancing frictions, making them appropriate primarily for active traders monitoring short horizons rather than passive allocators.^[87]

Investment advantages

Cost efficiency and accessibility

Exchange-traded funds (ETFs) achieve cost efficiency primarily through low expense ratios, often ranging from 0.03% to 0.20% for broad passive index-tracking variants, in contrast to the 0.50% to 1.10% asset-weighted averages for actively managed equity mutual funds as of 2024.^[99]^[100]^[101] This advantage derives from ETFs' structural reliance on passive replication of benchmarks, which curtails research and trading overheads, compounded by competitive dynamics among providers that have systematically eroded fees since the product's inception.^[102] Such efficiencies extend accessibility to retail investors by minimizing entry costs relative to alternatives like mutual funds, which often impose higher minimum investments and loads.^[23] Fractional share trading, supported by major brokerages, further lowers barriers, permitting purchases of ETF portions with as little as $5, thereby enabling diversified exposure without requiring full share prices that can exceed hundreds of dollars.^[103]^[104] These factors have empirically driven ETF adoption, with global assets under management reaching $18.81 trillion by the end of September 2025, reflecting accelerated inflows post-2020 amid retail investor influxes.^[7] Surveys indicate nearly half of ETF holders commenced investing during or after the 2020 market surge, attributing this to ETFs' cost structure and ease of access via digital platforms.^[105] This expansion aligns with market-driven pressures that prioritize investor returns over intermediary rents, fostering wider participation in capital markets.^[106]

Liquidity and trading flexibility

ETFs trade on major stock exchanges throughout the trading day at prices determined by supply and demand, akin to individual shares, enabling investors to execute transactions at intraday market levels rather than waiting for end-of-day valuations.^[45] This stock-like trading allows the use of limit orders, stop-loss orders, and other conditional strategies to control entry and exit prices, providing precise execution control unavailable in funds priced solely at close.^[107] Market makers continuously quote bid and ask prices, ensuring ongoing availability of shares and contributing to tight spreads that minimize trading costs for participants.^[108] In contrast to mutual funds, which transact only at the daily net asset value (NAV) and expose investors to potential timing discrepancies between order placement and execution, ETFs eliminate end-of-day pricing risks through real-time trading.^[109] This intraday flexibility supports tactical adjustments, such as rapid rebalancing in response to market movements, without the delays or NAV uncertainties inherent in mutual fund redemptions.^[110] For highly liquid ETFs tracking major indices, average bid-ask spreads remain narrow, frequently below 0.1% of share price, as evidenced by data on prominent U.S. equity products where round-trip costs average 0.15% or less.^[111] Empirical trading patterns demonstrate that ETF share volumes often exceed the combined trading activity of their underlying holdings, driven by secondary market arbitrage that aligns ETF prices with NAV and amplifies overall liquidity.^[112] This elevated volume facilitates efficient large-block trades and portfolio maneuvers, as investors can liquidate or adjust positions swiftly without proportionally impacting the underlyings, enhancing usability for both retail and institutional users.^[113]

Tax efficiency and diversification benefits

ETFs achieve tax efficiency primarily through their in-kind creation and redemption mechanism, whereby authorized participants exchange baskets of securities for ETF shares or vice versa without the fund realizing capital gains from selling assets.^[114] This process allows ETF providers to deliver low-basis stocks to redeeming participants, deferring taxable events and enabling tax-free compounding of gains within the fund.^[115] Unlike mutual funds, which often sell holdings to meet redemptions and trigger shareholder taxes, ETFs minimize such distributions by avoiding cash transactions.^[116] Passive ETFs further enhance tax efficiency via lower portfolio turnover rates compared to actively managed funds, as index-tracking strategies involve infrequent rebalancing tied to benchmark changes rather than discretionary trading.^[117] Annual turnover in passive equity ETFs averages below 20% in many cases, versus over 50% for active mutual funds, reducing the frequency of realized gains passed to investors.^[118] Empirical data underscores these advantages: in 2024, only 5.08% of equity ETFs distributed capital gains to shareholders, compared to 64.82% of equity mutual funds.^[118] Projections for that year indicated fewer than 4% of surveyed ETFs would distribute gains, with most under 1% of net asset value, reflecting the structural deferral enabled by in-kind mechanisms despite similar internal gain realization rates (around 4% annually for both ETFs and index mutual funds).^[119]^[114] ETFs facilitate diversification by packaging exposure to hundreds or thousands of underlying assets into a single tradable share, aligning with modern portfolio theory's emphasis on reducing idiosyncratic risk—the asset-specific volatility unrelated to market-wide factors.^[120] This structure allows investors to mitigate unsystematic risks that dominate undiversified holdings, as holding an ETF equates to proportional ownership in a broad index, diminishing the impact of any single security's performance.^[121] Per MPT principles, such broad exposure lowers overall portfolio variance without proportionally increasing expected returns, as diversification eliminates much of the non-systematic risk inherent in individual stocks.^[122]

Risks and criticisms

Tracking error and deviation risks

Tracking error measures the volatility of the difference between an ETF's returns and those of its underlying index, typically calculated as the standard deviation of the excess returns over a given period.^[123] It arises primarily from operational frictions in replication strategies, such as optimized sampling—where ETFs hold a representative subset of index constituents rather than the full portfolio to minimize transaction costs and enhance efficiency—which inherently sacrifices exact replication for lower expenses.^[124] Other contributors include management fees, which deduct from returns; delays in dividend reinvestment or corporate action processing; and rebalancing costs during index reconstitutions, where buying or selling securities incurs transaction expenses and potential price impacts.^[125]^[126] Deviation risks refer to temporary divergences between an ETF's market price and its net asset value (NAV), often manifesting as premiums or discounts driven by intraday supply-demand imbalances in the secondary market.^[127] While authorized participants typically arbitrage these gaps to realign prices with NAV, deviations can widen in scenarios involving index changes or cash drags from uninvested holdings pending trades.^[128] Empirically, tracking errors remain low for most liquid equity ETFs, with studies showing tighter alignment compared to index mutual funds, though optimized replication introduces measurable variance as a trade-off for cost savings.^[129] In illiquid underlying assets, however, errors spike due to wider bid-ask spreads and price discrepancies in thinly traded securities, amplifying deviations during rebalancing or sampling adjustments.^[130] For long-term investors, these errors compound minimally over extended horizons, but they pose heightened risks for arbitrageurs relying on precise NAV-price convergence for profitability.^[131]

Liquidity and market stress vulnerabilities

ETFs rely on Authorized Participants (APs) to maintain liquidity through the creation and redemption of shares in the primary market, which supports arbitrage and keeps secondary market prices aligned with net asset value (NAV). However, during periods of elevated market stress, APs often reduce participation due to increased risks in sourcing underlying assets, balance sheet constraints, and regulatory limitations, leading to impaired arbitrage and liquidity provision.^[132]^[133] Empirical analyses show that arbitrage activity declines significantly in high-volatility environments, particularly for bond ETFs where underlying markets are less liquid, resulting in wider bid-ask spreads and higher transaction costs for investors seeking to exit positions.^[132] This AP reticence causes ETF shares to trade at substantial premiums or discounts to NAV, amplifying price dislocations. For example, in 2015, certain ETFs experienced intraday discounts reaching up to approximately 10% amid volatility.^[134] Such deviations arise because secondary market trading, while continuous, cannot fully substitute for primary market functionality when APs withhold creations or redemptions, as dealers curtail risk-taking to manage their own liquidity strains.^[135] Studies confirm these deviations are temporary yet genuine liquidity vulnerabilities, challenging the notion that ETFs are invariably liquid regardless of underlying conditions. Panel regressions indicate that NAV spreads widen under stress, with reduced AP arbitrage efficiency propagating shocks from ETF prices to underlying securities via forced selling or withheld buying.^[132]^[135] In fixed-income ETFs, for instance, primary market flows halt more acutely, leading to procyclical outflows that exacerbate volatility in illiquid segments.^[132] While multiple APs typically provide redundancy, concentrated participation and stress-induced withdrawals underscore causal risks in the ETF arbitrage mechanism.^[133]

Systemic risks from passive dominance

The rise of passive investing through ETFs has prompted concerns that dominance by index-tracking strategies could undermine core market functions, particularly price discovery, by diminishing the role of active investors who incorporate fundamental research into valuations. Critics argue that as passive funds, which mechanically buy index constituents regardless of prices, grow to represent a majority of U.S. equity assets under management—exceeding 50% by mid-2025—this reduces incentives for active analysis, leading to less informative pricing and potential misallocations.^[136]^[137] Empirical observations include elevated correlations among stock returns, with Bank for International Settlements (BIS) analysis linking passive shares of 20-40% to increased co-movements that erode security-specific risk premiums and hinder efficient capital allocation.^[138] Similarly, studies highlight how passive dominance induces synchronous movements in unrelated stocks, amplifying systemic vulnerabilities during stress by undermining diversification benefits traditionally assumed in portfolio theory.^[139] However, causal evidence for systemic erosion remains limited, with markets exhibiting persistent efficiency despite passive inflows. Research indicates that price discovery has not demonstrably deteriorated, as remaining active participants—often concentrated in less efficient segments—continue to anchor valuations, consistent with Grossman-Stiglitz models where informed trading persists in equilibrium.^[140] Passive flows, being benchmark-driven rather than performance-chasing, exhibit lower herding than active strategies, potentially stabilizing prices by providing steady demand uncorrelated with short-term sentiment.^[141] Longitudinal data through 2025 shows no clear uptick in bubble formation attributable to passivity, with volatility patterns aligning more with macroeconomic factors than indexing mechanics.^[142] A related concern involves concentration among passive mega-firms, such as Vanguard and BlackRock, which together manage over $16 trillion in assets as of August 2025 and control a significant portion of index voting power, raising questions about common ownership effects on competition and risk propagation. While theoretical models suggest this could dampen firm-specific incentives, empirical tests find muted impacts on market outcomes, underscoring the need for ongoing monitoring rather than presuming imminent fragility.^[143] Overall, while passive dominance warrants vigilance for indirect channels like correlated exposures, data privileges stability over alarmist narratives of collapse.

Empirical performance and market impact

Passive versus active investing outcomes

Empirical studies consistently demonstrate that passive strategies, including those implemented via ETFs, deliver superior net returns for the median investor compared to active management. The S&P Indices Versus Active (SPIVA) U.S. Scorecards, which compare active funds to their benchmarks net of fees, reveal widespread underperformance among active managers. For instance, over the 20-year period ending in 2024, 94.1% of all domestic equity funds underperformed the S&P 1500 Composite Index.^[144] Similarly, in the mid-year 2025 SPIVA report, the majority of active funds across equity categories failed to match their respective benchmarks over 10- and 15-year horizons, with underperformance rates exceeding 85% in large-cap segments.^[145]^[146] This pattern persists despite occasional short-term active outperformance, as higher fees in active funds—often 0.5% to 1.5% annually versus under 0.1% for passive ETFs—erode any gross alpha generated before costs. Analysis from S&P Dow Jones Indices shows that while some active funds exhibit gross-of-fee outperformance, the expense drag results in net underperformance for most, explaining the failure to sustain edges over market cycles.^[147] Morningstar data reinforces this, noting that active strategies incur elevated costs for research and trading, which compound to disadvantage net returns over time.^[85] Assets under management reflect these outcomes, with passive vehicles achieving dominance even as active funds attract inflows from optimistic investors. By the first quarter of 2025, passively managed assets surpassed $16 trillion globally, widening the gap over active strategies, as passive AUM grew by $12 trillion in recent years compared to $4.8 trillion for active.^[85]^[148] This shift underscores investor recognition of passive reliability, though active proponents argue for potential advantages in less efficient markets like small-caps, where greater stock dispersion could enable skilled selection.^[149] However, SPIVA evidence tempers such claims: even in small-cap equities, where inefficiencies are presumed higher, over 70-80% of active funds underperform benchmarks net of fees over extended periods, with international small-cap funds showing 73.2% failure rates over 20 years.^[144] While active management may yield outliers in niche areas, the median outcome favors passive indexing, as survivorship bias and fee hurdles limit broad success.^[150] For most investors, therefore, passive ETFs provide a causally robust path to capturing market returns without the dilution from active costs and selection errors.

Influence on price discovery and volatility

Passive investing through ETFs has been associated with distortions in price discovery, particularly for mega-cap stocks, as inflows disproportionately elevate their valuations relative to fundamentals. A study modeling passive fund flows found that such investments raise stock prices of the largest index constituents more than smaller ones, leading to overvaluation of mega-firms and reduced relative pricing efficiency across the market.^[143] This effect stems from mechanical demand for index-heavy stocks, amplifying capitalization-weighted biases in benchmarks like the S&P 500, where the top 10 holdings often exceed 30% of total weight as of 2024. Higher passive ownership correlates with diminished stock price informativeness, as measured by pre-earnings announcement drift and analyst forecast revisions. Empirical analysis of U.S. equities from 1990 to 2020 shows that a one-standard-deviation increase in passive institutional ownership reduces the extent to which prices incorporate firm-specific information prior to earnings releases, with regressions indicating statistically significant negative effects across multiple proxies.^[151] Simulations of markets with elevated passive shares—approaching 50% ownership—demonstrate further erosion of informational efficiency, as passive strategies suppress incentives for active research and trading on private signals, leading to higher correlations and less responsive pricing to news. Counterarguments highlight the ETF creation-redemption arbitrage mechanism, which aligns ETF prices with underlying net asset values and indirectly supports stock-level efficiency by enabling authorized participants to exploit deviations. This process, involving in-kind exchanges of baskets, has been shown to mitigate intraday mispricings and restore relative valuations, particularly in liquid U.S. equities, though its effectiveness diminishes in less liquid segments or during stress.^[152] On volatility, while ETF trading can amplify short-term fluctuations—such as through rapid rebalancing—longer-term empirical evidence indicates no sustained market-wide increase, with aggregate volatility metrics like the VIX showing stability despite passive assets surpassing 40% of U.S. equity AUM by 2023.^[153] The decline in traditional active management exerts pressure on price discovery by reducing dispersed information aggregation, yet markets have adapted through growth in quantitative and algorithmic trading, which incorporates alternative data and high-frequency signals to partially substitute for fundamental analysis. These strategies, comprising over 30% of U.S. equity volume by 2024, help sustain responsiveness in non-mega-cap segments, though they may introduce herding risks in correlated factors.^[137]

Broader economic effects and empirical studies

Exchange-traded funds (ETFs) facilitate more efficient capital allocation by providing low-cost access to diversified portfolios, which alleviates financing constraints for underlying firms and enhances overall investment efficiency.^[154] Empirical analysis indicates that ETF ownership reduces reliance on peer stock prices for corporate investment decisions while increasing sensitivity to firm-specific prices, thereby aligning capital flows more closely with fundamentals.^[155] This mechanism supports broader economic growth by channeling low-cost capital into productive assets without the higher fees associated with active management.^[21] ETFs democratize wealth-building by enabling retail investors, including those saving for retirement, to participate in market returns at minimal expense ratios, countering traditional barriers to entry like high advisory costs.^[156] Global ETF assets under management reached $13.8 trillion by the end of 2024, with projections for continued expansion into 2025 driven by inflows into retirement vehicles such as target-date funds and defined-contribution plans.^[157] This growth has amplified participation in equity markets, potentially mitigating wealth concentration by broadening access to compounding returns, though direct causal links to reduced inequality remain empirically inconclusive.^[158] Critics argue that passive ETF flows exhibit valuation insensitivity, potentially fueling speculation and distorting capital allocation away from fundamentals toward index popularity.^[159] Federal Reserve research highlights how such flows can amplify global financial cycles, particularly in emerging markets, by heightening sensitivity to external push factors over local economic signals.^[27] However, empirical evidence does not substantiate claims of exacerbated wealth inequality; instead, studies show ETFs' low barriers may counteract disparities by empowering individual savers with tools previously reserved for institutions.^[160] Quantile cointegration analyses reveal no evidence of ETFs inducing systemic fragility in U.S. markets, as ETF growth correlates positively with long-term S&P 500 valuations across higher quantiles without destabilizing lower-tail risks.^[161] These findings, spanning 2000–2022 data, reject hypotheses of ETF-driven instability, attributing observed correlations to co-movement with underlying assets rather than causal contagion.^[162] Overall, macroeconomic studies affirm ETFs' net positive role in efficient resource distribution, though ongoing monitoring of passive dominance is warranted to preserve incentive-aligned allocation.^[17]

Key events and controversies

Role in flash crashes (2010 and 2015)

During the May 6, 2010, flash crash, exchange-traded funds (ETFs) experienced severe price dislocations, trading at discounts to their net asset values (NAVs) far exceeding those of individual component securities.^[163] Nearly 8,000 ETFs and individual equities saw abrupt declines, but ETFs disproportionately suffered, with some, like the ProShares UltraShort QQQ, briefly trading at prices implying a 60% deviation from NAV amid liquidity evaporation.^[163] This stemmed from the breakdown in the ETF creation-redemption arbitrage process, where authorized participants (APs) and market makers faced hedging difficulties in underlying markets strained by high-frequency trading (HFT) withdrawal and order imbalances, preventing timely basket exchanges to realign prices.^[164] The U.S. Securities and Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC) joint report identified this as a vulnerability, noting that ETF stubs—trades lingering without offsetting hedges—exacerbated intraday volatility, though HFT and a large E-Mini futures sell order were primary triggers rather than ETFs themselves causing the event.^[163] In the August 24, 2015, flash crash, triggered by a global sell-off amid Chinese market turmoil and commodity declines, ETFs again highlighted structural liquidity risks under stress.^[56] The S&P 500 ETF (SPY) opened down over 5% and triggered multiple trading pauses under market-wide circuit breakers and individual security limits, with ETFs showing larger price swings than underlying baskets due to secondary market illiquidity.^[55] SEC analysis found ETFs with the highest volume spikes and liquidity drops—up to 7 and 5 times the median, respectively—were far more prone to pauses, as APs hesitated to create shares amid volatile underlying prices, leading to premiums/discounts and forced sales at depressed levels.^[56] While ETF providers like BlackRock argued the dislocations reflected broader market panic rather than inherent flaws, regulatory reviews emphasized that apparent ETF liquidity masked thinner underlying asset resilience, amplifying transmission of shocks across portfolios.^[55]^[165] Both incidents underscored ETFs' reliance on secondary market trading for liquidity, which can decouple from primary market values during extreme volatility, potentially propagating crashes via mechanical selling and reduced arbitrage capacity.^[163]^[56] Post-event reforms, including enhanced circuit breakers and AP incentives, aimed to mitigate these risks, but empirical studies indicate persistent vulnerabilities in less liquid ETF segments during tail events.^[163]

Recent bubble warnings and rapid launches (2024-2025)

In the first nine months of 2025, 794 new exchange-traded funds (ETFs) launched globally, surpassing the 746 launches recorded for the entirety of 2024 and fueling concerns about an impending market bubble driven by unchecked inflows and proliferation.^[166] This acceleration reflects broader ETF assets reaching $12.2 trillion in the U.S. alone by August 2025, with $126 billion in monthly flows, amid warnings that passive strategies could amplify systemic vulnerabilities if sentiment shifts.^[75] Critics, including market analysts, have highlighted the risk of over-diversification in an era of passive dominance, where ETF inflows concentrate in a few mega-cap stocks, rendering traditional diversification superficial and potentially exacerbating volatility rather than mitigating it.^[167] Skeptics of bubble narratives point to historical parallels with the explosive growth of mutual funds in prior decades, which saw trillions in inflows without systemic collapse, as ETFs have similarly shifted assets from mutual funds—$6.1 trillion in ETF net inflows over the past decade versus $2.4 trillion outflows from mutual funds—demonstrating empirical resilience absent evidence of inherent fragility.^[168] Proponents argue that the surge underscores legitimate innovation, particularly in active ETFs, which captured approximately 37% of total ETF flows in 2025 and represented 85% of launches in recent months, enabling targeted strategies like option-income and merger-arbitrage funds that address investor demands unmet by pure indexing.^[75] This dynamic suggests that while rapid launches warrant scrutiny, they align with adaptive market evolution rather than speculative excess, with no verifiable data indicating imminent rupture akin to past asset bubbles.^[169]

Regulation and future outlook

Historical regulatory developments

The U.S. Securities and Exchange Commission (SEC) initiated ETF regulation through exemptive orders under the Investment Company Act of 1940 in the early 1990s, granting the first such relief in 1992 to enable indexed products with intraday redeemability and creation mechanisms distinct from traditional mutual funds. This culminated in the approval and launch of the SPDR S&P 500 ETF Trust (SPY) on January 22, 1993, marking the debut of exchange-traded funds in the U.S. market.^[170] These orders served as precursors to formalized rules like Rule 6c-11 by providing targeted exemptions from provisions on pricing, redemption, and affiliated transactions, fostering initial growth while imposing conditions for transparency and liquidity management.^[171] Throughout the 1990s and 2000s, the SEC issued over 300 exemptive orders, expanding ETF varieties to include sector, fixed-income, and commodity-based products, which required case-by-case demonstrations of investor safeguards against premium-discount risks and arbitrage failures. In 2008, amid financial turmoil, approvals extended to actively managed ETFs, such as the Bear Stearns Current Yield Fund, allowing non-transparent strategies under stricter oversight to prevent undue leverage and valuation discrepancies, thereby enabling product diversification without immediate systemic threats.^[13]^[172] The 2010 Flash Crash prompted intensified scrutiny of ETF mechanics, particularly creation-redemption processes and high-frequency trading interactions, leading to joint SEC-CFTC findings that highlighted liquidity mismatches during stress. Subsequent reforms included mandates for enhanced disclosures on synthetic replication and leverage in ETF prospectuses, alongside market-wide circuit breakers implemented in 2013 to halt trading during extreme volatility, aiming to curb cascade effects from ETF arbitrage disruptions.^[163]^[173] In Europe, the UCITS Directive of 1985 established a harmonized framework for cross-border marketing of collective investment schemes, initially focused on retail investor protections through diversification and liquidity rules, which later accommodated ETFs via UCITS III in 2001 permitting derivatives for efficient portfolio replication. UCITS IV in 2009 streamlined authorization for cross-border activities, boosting ETF adoption by ensuring passporting across EU states while enforcing risk management to balance innovation with financial stability.^[174]^[175]

Current oversight and SEC approvals

The U.S. Securities and Exchange Commission (SEC) oversees exchange-traded funds (ETFs) primarily under the Investment Company Act of 1940, with ongoing requirements for daily calculation and public disclosure of net asset value (NAV) to ensure transparency and alignment between market prices and underlying asset values.^[171] Authorized participants (APs), typically large financial institutions, facilitate the in-kind creation and redemption of ETF shares in large blocks at NAV, enabling arbitrage that minimizes premiums or discounts and supports market efficiency.^[2] This mechanism, combined with mandatory daily portfolio holdings disclosure on ETF websites under Rule 6c-11 adopted in September 2019, promotes empirical compliance and reduces instances of mis-selling by allowing investors to verify holdings and track deviations from NAV.^[170] ^[171] Rule 6c-11 streamlined ETF launches by permitting most index-based and transparent actively managed ETFs to operate without bespoke exemptive relief from the SEC, while introducing standardized conditions such as custom basket policies for creations and redemptions.^[170] This rule eliminated the need for repetitive approvals, fostering innovation within defined risk parameters, as evidenced by the subsequent proliferation of ETF products without increased systemic deviations from NAV.^[176] A pivotal application of current oversight occurred with the SEC's approval on January 10, 2024, of spot Bitcoin exchange-traded products (ETPs) from multiple issuers, marking the end of prolonged denials dating back over a decade and validating long-standing applications under revised surveillance and custody standards.^[30] These approvals adhered to existing frameworks, including enhanced market manipulation safeguards via intermarket surveillance agreements, without altering core ETF rules. As of October 2025, the active ETF segment continues to expand under Rule 6c-11 and related exemptions, with assets and launches surging due to streamlined operations rather than new regulatory overhauls.^[177] No major SEC reforms have been enacted since 2019, maintaining emphasis on transparency and AP-driven arbitrage to mitigate risks, though ongoing filings for innovations like multi-share classes test boundaries of current approvals.^[25]

Emerging trends and potential reforms

Active exchange-traded funds (ETFs) have experienced accelerated growth in 2025, capturing 29% of global ETF net asset inflows through June, up from 20% the prior year, driven by investor demand for flexible strategies amid volatile markets.^[169] This includes significant inflows into active fixed-income ETFs, which expanded more than five times faster than passive counterparts, reflecting a shift toward strategies seeking alpha in uncertain environments.^[178] Thematic ETFs focusing on artificial intelligence, infrastructure, and defense have also gained traction, with AI-related themes dominating mid-year outlooks due to ongoing technological advancements and geopolitical shifts.^[179]^[180] Emerging market ETFs, particularly those with exposure to India, have seen rising interest for diversification benefits and attractive valuations, with India's economy supported by strong domestic consumption and reforms.^[181] Funds like the VanEck India Growth Leaders ETF highlight opportunities in large-cap growth leaders, amid projections for India's continued outperformance within emerging markets.^[182] Overall, Europe-domiciled global emerging markets equity ETFs recorded notable flows in the second quarter of 2025, underscoring re-pricing dynamics in regions like India and China.^[183] Crypto and alternative asset ETFs represent a frontier for expansion, building on spot Bitcoin ETF approvals; U.S.-listed Bitcoin ETFs alone held approximately $179.5 billion in assets under management by mid-July 2025.^[184] Pending filings for altcoin ETFs, such as those for Ethereum and potentially Dogecoin, signal potential regulatory progress, though approvals remain stalled amid market volatility.^[185]^[186] These developments align with broader trends toward mainstreaming alternatives, including digital assets, as investors seek uncorrelated returns.^[187] Debates on ETF reforms center on mitigating risks from passive investing's dominance, such as index concentration, but empirical evidence favors enhanced disclosure over ownership caps or restrictions, given markets' demonstrated resilience.^[188] Despite 794 new ETF launches in the first nine months of 2025—exceeding the full-year total of 2024—no systemic crash has materialized, supporting arguments that rapid innovation enhances liquidity and efficiency without necessitating precautionary curbs.^[166] Data indicating passive strategies' outperformance in stable periods, coupled with active inflows signaling self-adjustment, underscores deregulation where liquidity and price discovery remain robust, countering calls for stability-focused interventions that overlook historical self-correction mechanisms.^[189]^[188]

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SPY: SPDR® S&P 500® ETF Trust - State Street Global Advisors
Launched in January 1993, SPY was the very first exchange traded ... Holdings and sectors shown are as of the date indicated and are subject to change.
[70]
Active ETFs are reshaping the market | iShares - BlackRock
Jul 15, 2025 · As of June 2025, active ETFs represent 9% of global ETF industry AUM, compared to 2% at the end of 2019.2. Much of this growth is being driven ...
[71]
Five common misconceptions about active ETFs
Sep 12, 2025 · As of August 14, 2025, there are more active ETFs (2,273) than passive ETFs (2,142) in the U.S.1 And while legacy passive ETFs still hold most ...
[72]
The SPIVA Report- Proof You Can Buy - Paul Merriman
Jun 25, 2025 · 10 years: 96% underperform! 15 years: 97% underperform! 20 years: 93% underperform. This is a powerful reason why I advocate for index funds.
[73]
SPIVA® U.S. Mid-Year 2025 - SPIVA | S&P Dow Jones Indices
In our largest and most closely watched comparison, 54% of actively managed large-cap U.S. equity funds underperformed the S&P 500. This was an improvement from ...
[74]
Active Fund Managers vs. Indexes: Analyzing SPIVA Scorecards
Apr 15, 2025 · Are active fund managers worth their fees? See the hard facts on the underperformance of active management from the latest SPIVA report.
[75]
[PDF] Monthly Active ETF Monitor - J.P. Morgan Asset Management
US ETF assets reached $12.2 trillion in August 2025, with $126 billion in flows. Over 37% of 2025 flows went to active strategies, with 60 active ETFs launched ...
[76]
Roughly 90% of Active Equity Fund Managers Underperform Their ...
Nov 3, 2024 · A new study from S&P shows that roughly 90% of active public equity fund managers underperform their index, and 81% of active public fixed income managers ...
[77]
ARKK | The ARK Innovation ETF managed by Cathie Wood
ARKK is an actively managed Exchange Traded Fund (ETF) that seeks long-term growth of capital by investing under normal circumstances primarily (at least 65% of ...Missing: example | Show results with:example
[78]
ETF growth market opportunities | Deloitte Insights
Apr 24, 2025 · Active ETF net inflows constituted about 26% of total ETF net inflows in 2024, compared to just 1% a decade ago. As investor awareness and ...
[79]
Rise of active ETFs: hype, hurdles and road ahead | EY Luxembourg
Mar 31, 2025 · According to Morningstar, actively managed equity ETFs alone grew 48% on an organic basis in 2023.6 The category has been booming since 2020 and ...
[80]
Smart Beta ETF: Definition, Types, Example - Investopedia
A smart beta ETF is an exchange-traded fund that uses a rules-based system for choosing investments. These ETFs are a blend of active and passive investing.
[81]
Smart Beta ETFs | Charles Schwab
Smart beta ETFs, also known as "strategic beta" or "factor-based" ETFs, use rules-based indexes. They are a low-cost way to access smart beta strategies.
[82]
[PDF] Performance of smart beta ETFs in the U.S. market: 2009–2019
This paper provides an empirical analysis of the performance of smart beta (SB). ETFs in the U.S. market in terms of their absolute and relative returns, the ...
[83]
[PDF] Smart beta: too good to be true? - Jacobs Levy Equity Management
Abstract. Smart beta strategies promise to deliver market-beating returns with simplicity and low cost, but the reality is more complicated.<|separator|>
[84]
Seizing Potential Opportunities with Active Fixed Income ETFs in 2025
Jun 25, 2025 · In 2025, active ETFs have grown more than five times faster than passive ETFs. Flows into these products have reached $354 billion year to date, ...
[85]
Active vs. Passive Funds: Performance, Fund Flows, Fees
Jul 9, 2025 · Passively managed assets grew to over USD 16 trillion, while actively managed assets stood at just over USD 14.1 trillion. In Europe, active ...
[86]
Smart beta, “smarter” flows - ScienceDirect.com
We document that when smart beta ETFs are more actively traded, mutual fund flow sensitivity to multi-factor alphas increases significantly.
[87]
Updated Investor Bulletin: Leveraged and Inverse ETFs
Aug 29, 2023 · To accomplish their objectives, leveraged and inverse ETFs pursue a range of investment strategies through the use of swaps, futures contracts, ...
[88]
Leveraged ETFs: The Potential for Big Gains—and Bigger Losses
LETFs primarily use futures contracts, index futures, and swap agreements to magnify the daily returns of the underlying index, stock, or other tracked assets.
[89]
Understanding Inverse ETFs: Differences from Short Selling & Key ...
Inverse ETFs are designed to profit from market declines by using derivatives, offering investors an alternative to traditional short selling.How Inverse ETFs Function · Inverse ETFs vs. Short Selling
[90]
Dissecting Leveraged ETF Returns: Explanation, Components, and ...
The First Leveraged ETFs. The first leveraged ETFs were introduced in the summer of 2006, after being reviewed for about six years by the Securities and ...
[91]
Leveraged ETF - Decay, Risk & Volatility - Intrinio
May 27, 2020 · Leveraged ETFs offer higher risk with less capital, but suffer from beta slippage, volatility decay, and have large drawdowns, and are not ...
[92]
Volatility Decay: Understanding the Hidden Risk in Leveraged ETFs
Aug 2, 2024 · Volatility decay, also known as beta slippage or time decay, refers to the tendency of leveraged ETFs to lose value over time in volatile markets.
[93]
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=5421274
[94]
[PDF] THE DYNAMICS OF LEVERAGED AND INVERSE EXCHANGE ...
Traditional ETFs that are not leveraged or inverse, whether they are holding physicals, total return swaps or other derivatives, have no need to re-balance ...
[95]
Benefits and Risks of Thematic ETFs - Investopedia
Thematic ETFs can provide early exposure to emerging sectors such as renewable energy, robotics, and blockchain.The Growth of Thematic ETFs · Types · Benefits · Risks
[96]
Thematic ETFs & thematic investing ideas | BlackRock
Thematic investing focuses on forward-looking themes, including technological advancements like robotics and semiconductors, as well as consumer-driven trends.
[97]
Spot Bitcoin ETFs: Everything You Need To Know - Chainalysis
Aug 7, 2024 · The Securities and Exchange Commission's (SEC) approval of spot Bitcoin exchange-traded funds (ETFs) on January 10, 2024, marked a significant ...
[98]
https://www.blackrock.com/us/financial-professionals/investments/products/thematic-etfs/
[99]
ETF vs. Mutual Fund Fees: How to Compare Them - Investopedia
In 2024, the average expense ratio for an index equity ETF was 0.14%. The average cost for an equity mutual fund was 0.40%.1 Overall, the average fees for ...
[100]
Five Takeaways from the 2025 Fact Book
May 29, 2025 · The simple average expense ratio of equity mutual funds (the average for all equity mutual funds offered for sale) was 1.10 percent in 2024.
[101]
How Fund Fees are Evolving in the US | Morningstar
Oct 8, 2025 · The asset-weighted average expense ratio for all active funds was 0.59% in 2023 and 2024, and the asset-weighted average expense ratio for all ...01The Fee Squeeze Shows... · 04How Fund Fees Are Shaped...
[102]
ETF Versus Mutual Fund Fees - Fidelity Investments
That said, according to Morningstar, the average ETF expense ratio in 2024 was 0.48% and 0.69% for index and active ETFs, respectively, compared with the ...
[103]
Best Brokers For Fractional Share Investing - Bankrate
Oct 1, 2025 · Charles Schwab's Stock Slices allows investors to buy a fractional share of any stock in the Standard & Poor's 500 Index with as little as $5.
[104]
Dollar-based Trading-Fractional Shares - Vanguard
Mar 28, 2025 · This means you can purchase fractions of shares, rather than having to calculate what you can afford to buy based on the price of a full share.
[105]
[PDF] RETAIL INVESTORS AND ETFs - The Investment Association
Based on the survey data, nearly half of ETF investors began their investment journey during or after the 2020 pandemic market boom, indicating that. ETFs are ...
[106]
U.S. ETF Growth Easily Outpaces Market Gains Since 2020
Aug 30, 2025 · According to Bloomberg, U.S. ETF assets have ballooned from around $4 trillion at the start of 2020 to a record $12.3 trillion today. While ...
[107]
Mutual funds vs. ETFs: Which is right for you? - Fidelity Investments
While an ETF also has a daily NAV, shares may trade at a premium or discount on the exchange during the day. Investors should evaluate the share price of an ...
[108]
[PDF] The ABCs of ETF liquidity | Vanguard
• ETF bid-ask spread: The average cost to trade ETFs is represented by their quoted spread on the secondary market. This metric can be viewed as the price ...
[109]
ETFs vs. Mutual Funds: Which To Choose | Vanguard
More traits that ETFs & mutual funds have in common · Both are less risky than investing in individual stocks & bonds · Both offer a wide variety of investment ...Etfs Vs. Mutual Funds: A... · Etf Or Mutual Fund: Which Is... · Vanguard's Etfs
[110]
Mutual funds vs. ETFs: Which is best for your investment strategy?
Aug 13, 2025 · ETFs can be traded throughout the day in brokerage accounts, while mutual funds only trade once per day at that day's net asset value when the ...
[111]
ETFs: Expense Ratios and Other Costs - Charles Schwab
Comparing bid/ask spread and expense ratio for two ETFs. Let's compare ... Bid/ask spreads (0.15% average per roundtrip), $15, $450. Operating expenses ...<|separator|>
[112]
ETF Spreads and Volumes - Fidelity Investments
If the ETF is popular and trades with robust volume, then bid/ask spreads tend to be narrower. But if the ETF is thinly traded, or if the underlying ...
[113]
Clearing up the misconception: ETF trade volume vs. liquidity
Feb 1, 2024 · ETF liquidity is determined by trading volume of all underlying holdings in the portfolio creation basket.
[114]
Role of Taxes in the Rise of ETFs | The Review of Financial Studies
As Figure 2 illustrates, ETFs are tax efficient because redemptions are made in kind with authorized participants (APs), thereby avoiding capital gains ...
[115]
The Role of Taxes in the Rise of ETFs
May 22, 2025 · The tax-deferral feature of ETFs also allows tax-free compounding of short- and long-term capital gains, creating larger accumulated future ...
[116]
Understanding the tax efficiency benefits of exchange-traded funds ...
For long‑term taxable account investors, ETFs are attractive because their in‑kind redemption capability helps to minimize year‑end capital gains for ...
[117]
[PDF] Setting the record straight: The truths about index fund investing
Potential for tax efficiency. Index funds typically have lower portfolio turnover—that is, their holdings are traded less often—than actively managed funds.
[118]
ETFs vs. mutual funds: Which is right for you?
Both ETFs and mutual funds are considered cost-efficient investment options that benefit from economies of scale.
[119]
Good News for ETF Investors: Capital Gains Distributions Remain Low
Dec 17, 2024 · Less than 4% of the ETFs we surveyed are projected to distribute capital gains this year. Of those, most are projected to pay out less than 1% of the fund's ...Good News For Etf Investors... · Sector-Equity Strikes Again · Exhibit 4. Etf Sponsors'...
[120]
Modern Portfolio Theory: Why It's Still Hip - Investopedia
By investing in more than one stock, an investor can reap the benefits of diversification—chief among them, a reduction in the riskiness of the portfolio.Understanding MPT · Types of Risk · The Efficient Frontier
[121]
Modern Portfolio Theory | Simpson Capital Management
Diversification eliminates idiosyncratic risk, which is the risk due to the uniqueness of the asset. MPT suggests it is not enough to look at the expected risk ...
[122]
Idiosyncratic Risk: What Individual Investors Should Know
Jan 1, 2025 · Stock market investors can diversify and minimize idiosyncratic risk by “buying the economy,” i.e. by allocating to ETFs or buying an overall ...
[123]
Understanding Tracking Error: Meaning, Influencing Factors, and ...
Tracking error is calculated by taking the standard deviation of the difference between the portfolio returns and the benchmark returns over a specified period.What Is a Tracking Error? · Key Influences · Ex-Post Tracking vs. Ex-Ante...
[124]
Understanding tracking error and tracking difference for an ETF
In laymen's terms, tracking error basically looks at the volatility in the difference of performance between the fund and its index. So, what factors affect how ...
[125]
ETF Tracking Errors: Protect Your Returns - Investopedia
Oct 18, 2024 · Fund management and trading fees are often cited as the largest contributor to tracking error. It is easy to see that even if a given fund ...
[126]
ETFs Tracking Error - CFA, FRM, and Actuarial Exams Study Notes
Jul 30, 2021 · Explore the sources of tracking error in ETFs, including index changes, cash drags, expenses, representative sampling, depositary receipts.
[127]
ETF premiums and discounts, explained - Vanguard
Aug 7, 2023 · Since market prices are ruled by supply and demand, an ETF's market price can diverge from its NAV. If there's heavy demand from buyers, the ...
[128]
Understanding premiums and discounts for ETFs - Fidelity Investments
In this case, any significant deviation between ETF price and NAV will likely vanish when both exchanges are open at the same time. Sign up for Fidelity ...<|control11|><|separator|>
[129]
[PDF] Tracking Errors of Exchange Traded Funds and Index Funds
This minimizes the annual capital gains distributions to investors and therefore reducing effective taxes. ... average tracking error of 16 basis points as ...
[130]
ETF Liquidity: how it impacts returns, volatility & tracking error
Jan 11, 2021 · We ﬁnd that illiquid ETFs have large tracking errors. The effect is more pronounced when underlying assets are less liquid.
[131]
Liquidity risk and exchange-traded fund returns, variances, and ...
We find that illiquid ETFs have large tracking errors. ... ETF illiquidity affects ETF tracking errors owing to liquidity differences in underlying assets.
[132]
Counterparty and liquidity risks in exchange-traded funds
Apart from being exposed to market and liquidity risk, ETF investors bear counterparty risk in ETFs using derivatives or engaging in securities lending.
[133]
None
**Summary of Authorized Participants (APs) in Maintaining ETF Liquidity**
[134]
Navigating ETF Discounts and Premiums During Turbulent Times
Mar 20, 2020 · During this span, the average daily premium was 2.3%. On Aug. 24, 2015, many ETFs briefly traded at substantial discounts to their true value. ...
[135]
[PDF] The recent distress in corporate bond markets: cues from ETFs
Apr 14, 2020 · The median discount was larger in IG securities (Graph 2, second panel). Yet the dispersion of such discounts was wider in HY ETFs, some of ...
[136]
Passive ETFs Hit Tipping Point as Dominance Brings New Risks
Jun 6, 2025 · ETFs and passive funds now control the majority of U.S. equity allocations. - Rising correlation undermines diversification as stocks move ...
[137]
The Risks of Passive Investing Dominance - Alpha Architect
Jul 25, 2025 · These include diminished diversification, heightened volatility, greater vulnerability to liquidity shocks, and less efficient price discovery.
[138]
The implications of passive investing for securities markets
Mar 11, 2018 · A shift towards passive investing could affect securities markets in two key ways. First, it could result in higher correlation of returns and less security- ...
[139]
[PDF] The Increasing Risks of Passive Dominance | Research Affiliates
Jun 24, 2025 · Passive dominance causes unrelated stocks to move synchronously, undermining diversification and potentially increasing systemic risk. Flows ...
[140]
The False Dichotomy of Active Versus Passive Investments
Jul 9, 2024 · Instead, in the Grossman and Stiglitz model, which is supported by empirical evidence, active and passive are in balance.
[141]
[PDF] A Survey of the Consequences of Passive Investment Funds for ...
Jul 8, 2025 · Overall, our understanding of the research suggests that passive investing increases the volatility of returns, though this is not equivalent to ...
[142]
[PDF] Passive Investing and Market Quality
Nov 19, 2024 · The importance of passive investing has risen substantially over the last decade, largely driven by the widespread adoption of passive exchange- ...
[143]
[PDF] Passive Investing and the Rise of Mega-Firms - LSE
Mar 22, 2025 · We study how passive investing affects asset prices. Flows into passive funds disproportion- ately raise the stock prices of the economy's ...
[144]
Active Management's Persistent Failure: A 2025 Perspective
Jun 24, 2025 · Over 20-year period 2005-2024, 94.1% of all domestic funds underperformed the S&P 1500 Composite Index. And of the 18 domestic fund categories ( ...
[145]
[PDF] SPIVA U.S. Scorecard Mid-Year 2025 - S&P Global
... and the Information. Technology Sector Underperformed in Q1 2025 and Outperformed in Q2 ... Report 1a: Percentage of U.S. Equity Funds Underperforming Their ...
[146]
SPIVA | S&P Dow Jones Indices
For over 20 years, our renowned SPIVA research has measured actively managed funds against their index benchmarks worldwide.
[147]
[PDF] How Much Do Fees Affect the Active Versus Passive Debate?
In this report, we examine the impact of fees on performance for both retail mutual funds and institutional managed accounts, using gross-of- fees returns.
[148]
[PDF] The Passive vs. Active Fund Monitor | PWL Capital
In dollar terms, passive funds increased their AUM by $12 trillion, compared to only $4.8 trillion for active funds. Active funds increased their AUM based ...
[149]
US small-caps undiscovered connection: Value-led periods and ...
Sep 12, 2025 · We wanted to know why value-led periods have tended to be more conducive to active outperformance than growth-led periods. Our view is that two ...
[150]
From Hot Hand to Cold Reality - New Evidence on the Fate of ...
Oct 6, 2025 · Explore evidence showing why active funds rarely sustain outperformance and how index investing offers a more reliable strategy.
[151]
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3243910
[152]
ETFs, arbitrage activity, and stock market efficiency: Evidence from ...
This study examines the relationship between share volumes in the ETF market, efficiency of the tracked stock market, and the role of arbitrage trades in this ...
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https://papers.ssrn.com/sol3/papers.cfm?abstractid=4551509
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An analysis of the regulatory effect based on equity incentive policies
ETFs have a positive effect on improving corporate investment efficiency. They help alleviate financing constraints, which in turn boosts investment efficiency.
[155]
Exchange-Traded Funds and Real Investment - Oxford Academic
Jul 20, 2022 · Greater nonmarket ETF ownership leads to increased (reduced) reliance of real investment on own (peers') stock prices. Overall, the evidence is ...
[156]
ETFs increase efficiency of markets, new study shows - LinkedIn
Jan 28, 2025 · ETFs have been one of the key tools behind the democratisation of finance, allowing all investors to make low-cost, immediate bets on ...
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Why ETF growth is booming - State Street Global Advisors
With a cumulative annualized growth rate (CAGR) of 20.1% since 2008, ETFs reached US$13.8 trillion assets under management (AUM) at the end of 2024.2 And ...
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[PDF] Wealth Inequality Revisited | Fraser Institute
Oct 10, 2025 · ... ETFs, mutual funds, other financial ... wealth inequality is harmful and presents counterarguments as well as relevant empirical evidence.
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"Buy Every Dip" Remains A Winning Strategy
Aug 25, 2025 · The problem is that these flows are “valuation insensitive.” We made such a point in Jesse Livermore's Approach to Speculation.” To wit ...
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Optimal Financial Knowledge and Wealth Inequality - PMC - NIH
We show that financial knowledge is a key determinant of wealth inequality in a stochastic lifecycle model with endogenous financial knowledge accumulation.
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Can ETFs affect U.S. financial stability? A quantile cointegration ...
Mar 5, 2024 · This study evaluates whether exchange traded funds (ETFs) threaten financial market stability by testing two hypotheses relating the growing importance of ETFs ...
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(PDF) Can ETFs affect U.S. financial stability? A quantile ...
Mar 5, 2024 · This study evaluates whether exchange traded funds (ETFs) threaten financial market stability by testing two hypotheses relating the growing ...
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[PDF] Findings Regarding the Market Events of May 6, 2010 - SEC.gov
May 6, 2010 · This is a report of the findings by the staffs of the U.S. Commodity Futures Trading. Commission and the U.S. Securities and Exchange Commission ...
[164]
[PDF] Preliminary Findings Regarding the Market Events of May 6, 2010
May 6, 2010 · The role of market makers and authorized participants in ETFs, and whether an inability to hedge their ETF positions during periods of severe ...
[165]
Fink: 'Flash Crash' wasn't the fault of ETFs - CNBC
Nov 3, 2015 · Exchange-traded funds took the heat for the latest market "flash crash," but BlackRock CEO Larry Fink said Tuesday they shouldn't be blamed.
[166]
Rapid growth of ETF market triggers fears of bubble - Reuters
Oct 17, 2025 · In the first nine months of 2025, some 794 new ETFs made their debut, topping the 746 launches recorded for the whole of 2024, which itself ...Missing: warnings | Show results with:warnings
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Why Diversification Is Failing In The Age Of Passive Investing
Sep 8, 2025 · Surface-level diversification is no longer enough in a market increasingly driven by passive flows and dominated by a few mega-cap names.
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NBFIs in Focus: The Basics of Mutual Funds and ETFs
Oct 15, 2025 · Over the past 10 years, ETFs have seen a net inflow of $6.1 trillion while mutual funds have seen a net outflow of $2.4 trillion. ETFs have ...Missing: parallels | Show results with:parallels
[169]
Active ETFs: Unlocking innovation for investors - iShares
Sep 2, 2025 · Active ETFs comprised 29% of global ETF net asset inflows and organic asset growth through June 2025, up from 20% the prior year.5; BlackRock ...
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SEC Adopts New Rule to Modernize Regulation of Exchange ...
Jan 13, 2021 · Since 1992, the Commission has issued more than 300 exemptive orders allowing ETFs to operate under the Investment Company Act. ETFs have grown ...Missing: developments | Show results with:developments
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[PDF] Exchange-Traded Funds (Conformed to Federal Register version)
Sep 25, 2019 · stated the definition of exchange-traded fund instead should include ETFs that have been listed within the past 90 days. Other commenters ...
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White Paper: Regulatory History Frames Current Issues for the ETF ...
Mar 15, 2024 · In this paper, we summarize some of the key milestones in the last 30 years, such as the introduction of actively-managed and semi-transparent ...Missing: timeline | Show results with:timeline
[173]
The 10th Anniversary of the Flash Crash - SIFMA
May 19, 2020 · Over 20,000 stocks/ETFs were executed at prices 60% off 2:40 pm prices. ... In September 2010, the CFTC and SEC released a joint study of the ...
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What is UCITS and how does it affect ETFs?
Mar 1, 2024 · The first iteration – or directive – of UCITS was adopted on 20 December 1985 to facilitate investment vehicles to operate throughout the EU ...Missing: history | Show results with:history
[175]
Legal Structure of ETFs: UCITS - justETF
May 31, 2017 · UCITS I, Common set of rules devised to enable cross-border distribution of investment funds aimed at ordinary investors. 1994, UCITS II ...
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An Empirical Analysis of SEC Rule 6C-11's Impact on the Usage of ...
Aug 21, 2023 · In September 2019, the SEC promulgated Rule 6c-11 to standardize the operation of all exchange-traded funds. Importantly, this rule provided ...
[177]
2025 Global ETF Outlook: The expansion accelerates - State Street
“In 2025, the ETF market is on track to surpass AU$300 billion (includes both CHESS and non-CHESS FUM). Active ETFs to represent over 50 percent of new ...
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Thematic ETFs in 2025: What's Next?
Jun 26, 2025 · While thematic ETFs ebb and flow in popularity, themes related to AI, infrastructure, and defense continue to capture investor interest.
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Thematic Investing 2025: AI and Geopolitical Trends | iShares
Jul 10, 2025 · Explore the latest investment themes in AI and geopolitics through the lens of thematic investing in our 2025 mid-year update.
[180]
Why is interest growing in emerging market ETFs?
Jul 28, 2025 · Interest in emerging market ETFs grows due to diversification, early-stage opportunities, re-pricing of earnings, and attractive starting ...<|separator|>
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7 Best Emerging-Market ETFs to Buy for 2025 | Investing | U.S. News
Jun 5, 2025 · VanEck India Growth Leaders ETF (GLIN). "India remains one of the most compelling opportunities within emerging markets, supported by a ...
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The Best Global Emerging Markets Equity ETFs | Morningstar UK
Jul 31, 2025 · Morningstar screened 65 ETFs for Gold ratings, which indicate the greatest chance of outperforming. The best-rated include iShares MSCI EM ESG ...
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North America Crypto Adoption: Institutions and ETFs - Chainalysis
Sep 17, 2025 · As of mid-July 2025, the global AUM for bitcoin ETFs has surged to approximately $179.5 billion, with U.S.-listed bitcoin ETFs leading the way ...
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https://www.marketplace.org/story/2025/10/20/altcoin-etf-options-stalled-by-shutdown
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2025 ETF trends: What's next for ETFs? - State Street Global Advisors
Jul 18, 2025 · Explore three ETF trends we expect will continue to fuel the exponential growth of exchange traded funds (ETFs) in 2025.Missing: 2000s | Show results with:2000s
[187]
Passive Still Works - But Not In 2025 | Seeking Alpha
Jul 21, 2025 · Passive ETFs like VOO ,QQQ are more top-heavy than ever. With stretched valuations, any earnings miss from mega caps can sink returns.Missing: reforms | Show results with:reforms
[188]
Active vs. Passive Management in 2025: Investor Sentiment Shifts ...
Sep 19, 2025 · Morningstar reports 33% active strategy survival in 2025, down 14% from 2024, as passive equity dominance grows amid volatile markets.