Crypto, SEC Action Could Command ETFs in 2024 After Record-Breaking 2023

Crypto, SEC Action Could Command ETFs in 2024 After Record-Breaking 2023

Crypto, SEC Action Could Command ETFs in 2024 After Record-Breaking 2023



There was a record number of exchange-traded funds (ETFs) created in the U.S. during 2023. A rise in active ETFs, the addition of an ETF share class to existing mutual funds, and a shift toward more structured products were hallmarks of the record-setting year for this market.

Trends in 2023

One ETF data analyst said he expects crypto and SEC regulation to feature prominently for ETF investors in 2024. The record number of exchange-traded funds (ETFs) created in 2023 indicates that the pooled investment securities have captured the attention of a broad range of investors.

ETF Market Insights

Aniket Ullal, head of ETF data and analytics at CFRA, told Investopedia notable trends in the ETF market in the past year include an increase in active ETFs, the addition of ETF class to existing mutual funds for tax benefits, and a shift toward structured products.

Record-Breaking 2023

ETF inceptions reached an all-time high in 2023. By Dec. 15, there were 506 U.S.-domiciled ETF inceptions, surpassing the previous high of 475 set for all of 2021, according to data provided to Investopedia by Morningstar Direct.

Key Trends in 2023

Beyond the uptick in ETF creation in 2023, Ullal noted an increase in active ETFs, mutual funds offering an ETF share class, and structured products. An active ETF is one in which a fund manager determines the underlying portfolio allocation, as opposed to using a passive investment strategy, which tracks the performance of an index.

Active ETFs

Nearly two-thirds (65.3%) of the listings in 2023 were considered active, or not tied to a specific index, compared with an average of less than a quarter (22.8%) having that characteristic during the period from 2000 to 2022, according to CFRA data.

Mutual Fund and Structured ETFs

Another notable trend in 2023 was a few large fund managers filing to add an ETF class to their existing mutual funds to help reduce clients' tax bills, as this option became available more widely. In May 2023, a Vanguard patent expired that had lowered capital gains taxes on its ETFs by structuring them as a distinct share class of mutual funds, so at that point, other brokerage firms could start employing the strategy as well.

ETF competitors of Vanguard, such as Fidelity and Dimensional Fund Advisors, have begun filing applications with the SEC to issue a class of ETF shares for their existing mutual funds.

Ullal also highlighted a shift toward a greater number of structured products, such as options-based ETFs and defined outcome ETFs, during the latest year. For instance, Goldman Sachs launched two ETFs, the S&P 500 Core Premium Income ETF (GPIX) and the Nasdaq-100 Core Premium Income ETF (GPIQ).

2024 Expectations

In the new year, SEC actions—specifically those related to the Vanguard-model ETF share class for existing mutual funds and spot bitcoin ETFs—could be hot topics for ETF investors.

SEC Actions

After the Vanguard patent expired earlier in 2023, some competing asset managers filed with the SEC to launch their own ETF class shares for their mutual funds. But there didn't seem to be a rush from the ETF giants to implement the mutual fund-ETF hybrid model, which could be attributed to looming concerns about potential regulation because the process affects federal tax revenue.

It's not clear yet whether the SEC will approve the applications filed by other fund managers, including Fidelity and Dimensional Fund Advisors, Ullal said.

Crypto-Focused ETFs

Another trend in the field that Ullal expects in 2024 is crypto-focused ETFs. From an asset size perspective, crypto is small, but when considering what interests investors, Ullal said crypto is “significant” for the new year because there is a “possibility of a spot bitcoin ETF” launching in 2024.

In August of 2023, a federal appeals court ruled in favor of crypto asset management firm Grayscale, finding that the SEC didn't provide sufficient reasoning for blocking Grayscale's request to convert its Grayscale Bitcoin Trust (GBTC) into an ETF.

The SEC had rejected Grayscale's request for the ETF conversion, citing security concerns about fraudulent and manipulative market activity.