What is the latest on ETFs?

Introduction

Exchange-traded funds (ETFs) have grown over the years from a niche, cost-efficient vehicle for passive index exposure into a versatile modular building block of modern portfolios. As of 2025, the ETF ecosystem is witnessing substantial innovation, regulatory shifts, and evolving investor appetites. This essay reviews key developments, examines driving forces, explores challenges, and outlines prospective directions for the ETF industry.

Key Recent Developments in ETFs

1. Surge in Active ETFs and New Launches

One prominent trend in 2025 is the increasing share of actively managed ETFs relative to passive ones. A substantial majority of new funds are active.

• Vanguard, long known for passive index strategies, has announced plans to launch its first active U.S. equity ETFs in 2025 (converted from existing mutual fund strategies) .
• In fixed-income space, Vanguard also introduced new bond ETFs (e.g. government securities, inflation-protected bonds) to expand its ETF presence.
• Among newly launched ETFs, active funds dominate in terms of both number and assets raised. For instance, among the top five ETF launches by AUM in 2025, four are active.

This shift reflects investor demand for more flexible, differentiated strategies that can respond to changing market regimes rather than simply tracking indices.

2. Crypto / Digital Asset ETFs Gaining Ground

A dramatic regulatory move by U.S. regulators has the potential to transform the landscape for crypto-related ETFs:

• In September 2025, the U.S. Securities and Exchange Commission (SEC) announced new rules that significantly streamline the approval process for spot cryptocurrency ETFs (e.g. ones directly holding crypto vs those based on futures). Under the new regime, the approval process for qualifying products will cut timeframes (e.g. from up to 270 days to ~75 days) and reduce individual reviews for products meeting standard criteria.
• Asset managers are lining up new filings; first ETFs under this revised framework (for coins like Solana, XRP) are expected imminently.
• Meanwhile, meme cryptocurrency Dogecoin got its own ETF (ticker DOJE), launched via REX-Osprey, with direct exposure (60% in Dogecoin) along with related products.

These developments signal evolving regulatory openness to digital assets and increasing integration of crypto into mainstream ETF markets.

3. Institutional and Central Bank ETF Activity

ETFs are no longer just instruments for retail or institutional asset managers — central banks and sovereign institutions are also active participants.

• The Bank of Japan (BOJ) recently announced it will begin unwinding its large holdings of ETFs (and REITs). This marks a pivot from ultra-loose monetary policies in which the BOJ had used ETF purchases as a tool to stabilize markets. The BOJ plans to offload ~¥330 billion in ETFs annually, signaling confidence in market stabilization and underlining a shift to more conventional monetary policy approaches.
• In Europe, asset managers such as Schroders are entering the active ETF space, launching new global equity and corporate bond ETFs to compete in a fast-expanding European ETF market (which, by mid-2025, saw €13.4 billion in inflows in the first half, more than double the prior year).
• In Asia, regulatory changes are also underway—for example, Thailand has approved the sale of leveraged and inverse ETFs to retail investors starting in 2025, expanding access to more complex instruments.

4. Theme, Strategy, and Sector Innovation

ETFs in 2025 are not merely replicating broad market indices — many are thematic, strategic, or tactical:

• Thematic ETFs focused on AI, cybersecurity, climate, defense, and emerging technologies continue to proliferate. For example, Europe’s HANetf is launching a Europe-focused defense ETF targeting regional defense firms (excluding U.S. players).
• Index providers and academic researchers are also designing more refined approaches to quantifying exposure to structural themes, such as AI, by processing textual disclosures (10-K filings) to more transparently define thematic allocations.
• The new ETF launches list (as of September 2025) already includes funds tied to private credit strategy, buffer ETFs, leveraged cost strategies, and crypto-based ETFs (e.g. XRP, DOGE).

5. Flow Patterns and Investment Behavior

Looking at money flows and performance:

• ETF flows in 2025 remain robust. The U.S.-listed ETFs have seen cumulative inflows approaching $556 billion in 2025 alone.
• Some ETFs focused on niche or volatile themes (e.g. Ethereum, AI) have shown strong performance and attracted attention, though outflows and volatility remain risks.
• On the flipside, within traditional multi-asset mutual funds in India, inflows have dropped (e.g. 43% decline reported for multi-asset allocation mutual funds in August 2025), possibly indicating a shift in investor preference toward simpler, transparent vehicles such as ETFs.

Challenges, Risks & Considerations

While the ETF ecosystem is dynamic and growing, it also faces several challenges and structural tensions:

1. Liquidity and Tracking Error in Niche / Illiquid Assets

• The more exotic or niche the underlying (e.g. certain cryptocurrencies, frontier markets, private credit), the greater the risk of liquidity constraints, wider bid-ask spreads, and tracking error.
• Actively managed ETFs may reduce tracking error relative to passive peers in volatile regimes, but also introduce manager risk — the possibility that the active strategy underperforms.

2. Regulatory Uncertainty and Oversight

• The rollout of crypto ETFs depends heavily on regulatory clarity and enforcement. Even as the SEC eases rules, uncertainties remain around custody, valuation, governance, and investor protection.
• In different jurisdictions, rules vary widely (e.g. Thailand’s new rules for leveraged ETFs, restrictions on certain leverage products in other markets).
• For central banks or sovereign ETF operations (e.g. BOJ), sudden large trades may distort markets, requiring careful calibration of unwind schedules.

3. Cost Pressures and Competition

• The proliferation of ETFs (especially passive) drives competition on expense ratios and features. Lower-cost ETFs tend to attract more inflows.
• However, ultra-low-cost also means tight margins for ETF providers, prompting consolidation or thinning of product lines.

4. Structural Risks with Thematic/Concentrated Bets

• Many newer ETFs are heavily tilted toward high-conviction themes (AI, crypto, defense). If those themes disappoint, the downside risk is more pronounced.
• Because thematic indices and strategies often overlap (e.g. many “AI” ETFs hold similar names like NVIDIA, Microsoft, etc.), the effective diversification might be lower than it appears.

5. Tax, Accounting and Operational Complexities

• International investors may face cross-border tax, withholding, or accounting complexities, especially with dividends, distributions, or gains from crypto.
• ETFs investing in “exotic” assets (crypto, private credit, tokens) must handle custody, valuation, asset eligibility, and redemption design (in-kind vs cash redemptions).

Outlook and What to Watch

Looking ahead, several themes and milestones will likely shape the trajectory of ETFs:

1. Acceleration in Crypto Spot ETF Adoption
   If the SEC’s streamlined rules function smoothly, many new crypto ETFs may launch in late 2025, expanding beyond Bitcoin to altcoins like Solana, XRP, and beyond. This could open a new frontier for investors seeking regulated, familiar access to digital assets.
2. More Traditional Managers Going Active in ETF Format
   As seen with Vanguard’s move, more mutual fund managers may convert strategies into ETF wrappers. The trend toward active within ETFs is likely to grow, especially in bond, alternative, and multi-asset strategies.
3. Localization in Emerging Markets & Asia
   In markets like India, Southeast Asia, Latin America, and Africa, ETF penetration is still relatively nascent. Product innovation (e.g. India sector ETFs, ESG ETFs) and regulatory support could catalyze adoption.
4. Thematic Refinement and Hybrid Strategies
   We may see hybrid ETFs combining passive core exposures with tactical sleeves (active overlays), or more dynamic rebalancing based on macro signals. Also, the way themes are constructed (e.g. AI via textual analysis, ESG via dynamic scoring) will become more sophisticated.
5. Institutional and Sovereign Participation
   As central banks or sovereign wealth funds further engage with ETFs (either as holders or as issuers of sovereign ETFs), this could deepen markets but also inject risks if policy shifts.
6. ESG, Sustainability, and Impact ETFs
   Investors continue to demand ESG and impact strategies. Regulators may standardize metrics (e.g. carbon metrics, climate risk) which in turn may influence flows and performance.
7. Consolidation and Scaling
   The proliferation of ETFs might lead to consolidation — weaker products may be closed or merged, and winners will be those with scale, low costs, robust tracking, and strong brand/distribution.

Conclusion

In 2025, the ETF market sits at an inflection point. No longer simply instruments for passive exposure, ETFs are evolving into a vibrant ecosystem of active strategies, thematic bets, crypto-enabled access, and structural participants like monetary authorities. Yet this transformation comes with heightened complexity, regulatory uncertainty, and competitive pressure. For investors and institutions alike, success in the evolving ETF landscape will depend on discerning between substance and hype, managing liquidity and costs, and staying attuned to regulatory developments.