Exchange traded funds (ETFs) have grown phenomenally since they were first launched in 1990.
The total value of all ETFs was $2.6tn in 2014. 10 years later, that’s risen to around $13trn and there are now 12,000 ETFs listed globally.
From 2015 to 2024, the percentage of HL clients invested in ETFs has more than doubled.
This article isn’t personal advice. If you’re not sure if an investment is right for you, ask for financial advice. Investments rise and fall in value, so you could get back less than you invest.
ETFs hold a basket of underlying investments, with the aim to track a particular index, stock market or commodity. For example, an ETF might track FTSE 100 index which represents the largest 100 companies in the UK. ETFs often hold investments like shares and bonds.
ETFs have some very similar characteristics to funds. For example, their value is based on the performance of the underlying investments and they’re ‘open-ended’, so units can be created and destroyed based on supply and demand.
The main difference between the two is that ETFs trade on a live exchange, with a live market price, whereas funds do not.
Why invest in ETFs?
As you can see, demand for ETFs has skyrocketed and that’s because of the benefits they give investors.
ETFs are a simple, quick and low-cost way to invest.
They let you invest in a range of shares, bonds or commodities in one single investment. So, you don’t have to pick the individual investments yourself.
They provide diversification compared to investing in individual shares – so all your eggs aren’t just in one basket. ETFs can also be a cheaper way to invest, as they normally have low annual management charges.
ETFs offer lots of choice for investors – whether you want to track the global stock market or a certain index like the FTSE 100 or S&P 500. And there are ETFs that focus on specific sectors, countries and themes if that’s what you’re looking for.
As ETFs trade on stock exchanges, they can be bought and sold at any point during the trading day. This is different to funds which are only priced once a day.
But because ETFs trade like shares, it means you have to pay dealing charges when you buy and sell – unless it’s for a child in a Junior ISA where you don’t pay any charges if you deal online (telephone dealing charges apply).
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Record growth in store for ETFs – what’s next?
The ETF market was predicted to grow significantly in 2024, with expectations of a 20-25% annual growth rate. It hasn’t disappointed.
Net new money invested into ETFs globally is on track to hit a new record high this year.
The current record of $1.3tn was set in 2021. So far, to the end of August in 2024, this amount stands at $969bn. In comparison, it was $848bn at this time in 2021.
The total value of all ETFs globally is expected to end the year at over $14tn. Another huge milestone. In fact, by June 2028, they’re predicted to reach at least $19tn.
US versus Europe – a new ETF market contender?
ETFs are very popular in the US, which is their biggest market by some distance. This is partly linked to tax benefits which only apply there.
Europe is the second biggest market for ETFs and recently broke through $2tn. The European ETF market grew 28% in 2023 and is forecast to rise 15% annually for the next five years. It’s currently predicted to hit £3tn by June 2028.
What does all this mean for investors?
The ETF market is growing and reaching new highs – and this doesn’t look like it’s going to stop anytime soon.
However, perhaps more importantly, they’re also innovating. And these exciting developments are opening more opportunities for investors, letting you invest in different things, and in more areas of the global stock market.
With the outlook for ETFs looking bright, it could be worth thinking about adding some or more ETFs to your portfolio.
Looking for ETF ideas?
If you want a simple, low-cost way to invest in the stock market, explore our latest ETF ideas.
