Crypto, SEC Action May Order ETFs in 2024 After Record-Breaking 2023

The record number of exchange-traded funds (ETFs) created in 2023 suggests that the pooled investment securities have attracted the attention of a wide range of investors.

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

The analyst also shared his expectations for the year ahead, led by cryptocurrency ETFs and likely regulatory action from the Securities and Exchange Commission (SEC).

2023 launches Break ETF Records

ETF fundamentals peaked in 2023.

As of Dec. 15, there were 506 US-domiciled ETF launches, surpassing the previous high of 475 set for all of 2021, according to data provided to Investopedia by Morningstar Direct.

Trends in 2023: Active, Mutual Fund, and Structured ETFs

In addition to the increase 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.

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

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

Vanguard’s ETF competitors, 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 to a greater number of structured products, such as option-based ETFs and defined-outcome ETFs, over the past year. For example, Goldman Sachs launched two ETFs, the S&P 500 Core Premium Income ETF (GPIX) and the Nasdaq-100 Core Premium Income ETF (GPIQ).

These ETFs use the Standard & Poor’s 500 and Nasdaq 100 indexes as benchmarks, which track companies on the indexes to provide “monthly income distributions at a relatively stable rate,” Goldman said. The firm said these types of structured products are particularly attractive to investors who experience periods of market volatility.

What to Watch in 2024: The SEC and Crypto ETFs

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.

After the Vanguard patent expired earlier in 2023, some rival asset managers filed with the SEC to introduce their own ETF class of shares for their mutual funds. But there appears to have been no rush from the ETF giants to implement the mutual fund-ETF hybrid model, which can be attributed to looming concerns about potential regulation as the process affects federal tax revenue.

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

Another trend in the field that Ullal anticipates in 2024 is crypto-focused ETFs.

From an asset size perspective, crypto is small, but when you consider 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 2023, a federal appeals court ruled in favor of crypto asset management firm Grayscale, finding that the SEC did not provide sufficient reason to block Grayscale’s request to convert its Grayscale Bitcoin Trust (GBTC) into an ETF.

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