Momentum and private assets: The trends driving ETFs to record inflows

Key Concepts

• ETF Marketplace Development: Growth, trends, and investor behavior in the Exchange Traded Fund market.
• Net Inflows: The total amount of money invested into ETFs, minus withdrawals.
• Low-Cost Beta: Investment strategies that track broad market indexes at a low expense ratio.
• New Trends in ETFs: Emerging asset classes and strategies gaining traction, including digital assets, cryptocurrencies, income generation, and private assets.
• Democratization of Access: Making investment opportunities, previously exclusive, available to a wider range of investors.
• Private Assets: Investments in non-publicly traded companies or assets, such as private credit and CLOs.
• Fee Sensitivity: Investor willingness to pay fees based on the complexity and potential return of an ETF.
• Momentum Investing: A strategy that involves buying assets that have been performing well, with the expectation that they will continue to do so.
• Broadening Out Trade: A market scenario where investors diversify beyond heavily weighted sectors into other areas of the market.
• Defensive Sectors: Industries that tend to perform relatively well during economic downturns, such as healthcare.

ETF Marketplace State of Play and Record Inflows

As of the end of October in the 2025 year, the ETF marketplace has experienced unprecedented growth. Todd highlights that the industry has seen $1.11 trillion in net inflows, a figure that is approximately $100 billion ahead of the record set for all of 2024 ($1.12 trillion). This indicates that 2025 has been the best year on record for the ETF industry across individual product levels, including equity, fixed income, gold, and crypto. The sentiment is that it's a "great time to be an ETF investor" as it's "hard to find an ETF that's out of favor with investors."

Secular Trends vs. New Trends in ETF Development

Anna, Chief Business Officer at a major ETF issuer, categorizes ETF development into two main areas: secular trends and new trends.

Secular Trends: The Dominance of Low-Cost Beta

• Key Point: Low-cost beta strategies continue to attract the majority of new investment.
• Specifics: Approximately 50% of new flows, equating to nearly $500 billion, have been directed into S&P 500 exposure and sector-specific ETFs. These products offer "single basis points exposure to segments of the markets."

New Trends: Innovation in Digital Assets, Income, and Private Assets

• Key Point: Emerging trends are focused on income generation, digital assets (cryptocurrencies), and private assets.
• Purpose: These innovations aim to "complement and supplement the low-cost exposure to the market."

Growth and Innovation in New ETF Categories

Anna elaborates on the rapid growth of these newer ETF categories, with State Street seeing significant activity and innovation driven by investor demand.

Private Assets: Democratizing Access to Alternative Investments

• State Street's Focus: State Street has been particularly vocal about private assets, believing there's a strong need for investors to diversify and gain access to these markets.
• Democratization Strategy: Their approach is centered on "democratization," aiming to "open the doors for investors to really participate in the growth of the markets."
• Partnerships: State Street has formed partnerships with major players like Blackstone, Apollo, and Bridgewater.
• Product Performance:
  • ETFs offering exposure to CLOs (Collateralized Loan Obligations) and private credit are seeing accelerated flows.
  • The "All Weather" ETF, a strategy from Bridgewater, has surpassed $600 million and is on track to reach $1 billion within its first 12 months.
  • Their public and private asset ETF experienced "very healthy flows" in October, signaling an appetite from RIAs (Registered Investment Advisors) and other investors for private credit growth.
• Market Conditions: The recent "risk on" sentiment following "liberation day" has accelerated the development of these new trends.

Fee Sensitivity and Investor Willingness to Pay Premiums

The discussion shifts to the fee structure of ETFs, particularly for newer and more complex strategies.

The Two Ends of the Spectrum: Low-Cost vs. Premium Products

• Low-Cost Focus: A significant segment of investors remains highly "fee conscious."
  • Example: State Street's SPYM (S&P 500 ETF) is nearing a milestone of $100 billion in assets under management and has seen strong inflows in 2025. Similar S&P 500 products from Vanguard and iShares are also performing well.
• Premium for Unique Access: Investors are "willing to pay a little bit more for the complement to their portfolios" when ETFs offer access to areas that are "harder to obtain."
  • Examples:
    • Bitcoin-oriented ETFs are priced at a premium compared to S&P 500 products.
    • Private credit-based products also command a higher premium due to their unique market access.
    • The simplified private credit ETF, PCR, is cited as an example of innovation in this space.
• Actively Managed ETFs: These also command higher premiums.

When Fees Matter Most

Todd clarifies the role of fees:

• Simple Strategies: For relatively simple strategies tied to familiar indexes (e.g., S&P 500, gold), fees matter significantly. GLDM, a low-cost gold ETF, is gaining traction.
• Complementary Strategies: When ETFs are used to complement a core portfolio with alternatives, thematic strategies, or actively managed products, "what's inside the portfolio much more than just how cheap this portfolio is."
  • Example: Thematic ETFs, such as the nuclear energy ETF NUKZ, which is benefiting from the AI trend, can charge higher fees (50, 65, or 75 basis points) and still see popularity.

Market Momentum and the Broadening Out Trade

The conversation turns to the current market environment, characterized by record highs in major indices, and whether this momentum is sustainable or if a "broadening out" trade is emerging.

The Dominance of Momentum and AI

• Key Sectors: Technology, consumer discretionary, and communication services are identified as the most heavily weighted and performing sectors, largely driven by the AI trend.
• Durability of Momentum: Anna believes the momentum is playing a significant role and that a shift from growth to value is "not happening just yet" due to the AI-powered momentum.
• Rebalancing Trade: The rebalancing trade, which involves diversifying into other sectors, is unlikely to occur until there's a "signal from the market indicating a slowdown in these big trends."

The Psychology of Momentum and the Need for a Market Correction

• Challenging Diversification: Anna notes that it's difficult for investors to "step away from something that they love from something that is producing the outcome that they want to see" when it's performing well.
• Catalysts for Broadening Out: A market correction, or a couple of earnings cycles showing a slowdown in AI and tech trends, would be necessary for investors to "really start spreading out."
• Market Strength: The current market strength, with predictions of the S&P 500 reaching 6,900 to 7,000+ points and the NASDAQ 100 hitting all-time highs, makes horizontal diversification challenging. This broadening out is anticipated more likely at the beginning of the next year.

Signs of a Potential Market Downturn and Investor Positioning

Todd addresses what investors should look for as potential indicators of a market downdraft.

Watching for Defensive Sector Gravitation

• Healthcare Sector Performance: The Healthcare Select Sector SPDR ETF (XLV), which had been out of favor, began to regain favor in October, both in terms of performance and inflows.
• Underlying Strength: Stronger financial results from leading pharmaceutical companies have been reported.
• Defensive Play: Healthcare is considered a more defensive sector, and its increasing appeal suggests investors may be "gravitating towards that as a way of diversifying away from some of those sectors like technology."

Conclusion/Synthesis

The ETF marketplace is experiencing a record-breaking year driven by strong inflows, particularly into low-cost beta strategies. However, significant innovation and investor interest are also evident in newer categories like digital assets, income generation, and private assets, where investors are willing to pay a premium for unique access. While market momentum, fueled by AI and technology, continues to dominate, signs of a potential shift towards diversification into more defensive sectors like healthcare are emerging. The timing of a broader market rebalancing is likely dependent on a market correction or a slowdown in the current dominant trends, with a potential increase in diversification focus anticipated for the beginning of the next year.