ETFs in Investment Portfolios - Exchange-traded funds, better known as ETFs, have become one of the most important tools in the modern investment world. They combine the best features of mutual funds and individual stocks, offering both diversification and flexibility. In recent years, ETFs have grown in popularity across the globe. By the end of 2024, global ETF assets under management had reached about $14.8 trillion, supported by $1.88 trillion in net inflows. The U.S. market alone crossed the $10 trillion mark, while projections show global ETF assets may reach $25 trillion by 2030.
The rapid expansion has been powered by both retail investors and institutions. Europe is also seeing steady growth, with assets expected to increase from about $2.3 trillion at the end of 2024 to nearly $4.5 trillion by 2030. ETFs are no longer just passive index trackers; they now include active funds, thematic investments, and even income-focused products. Their rise has reshaped portfolio management strategies worldwide.
Recent years have witnessed several innovations in the ETF industry. Active ETFs have become extremely popular. In 2024, nearly half of all net inflows in the U.S. went into active ETFs, while global active ETF assets exceeded $1 trillion. Analysts expect this figure to rise to $4 trillion by 2030. In Europe, active ETF flows tripled in 2024, reaching €19.1 billion, as about 61% of wealth managers expressed plans to raise allocations.
A unique launch came in September 2025 when VistaShares introduced an ETF that tracks the stock picks of well-known hedge fund manager Bill Ackman. This product, known as ACKY.P, also aims to generate around 15% annual income by writing covered call options. The fund is marketed as a diversifier rather than a core portfolio holding.
Fidelity has also entered the market with two all-ETF model portfolios that combine active and passive ETFs. By late 2024, there were nearly 4,000 ETFs available in the U.S. alone, and assets in ETF model portfolios rose 50% to $125 billion.
Cost efficiency remains another key driver. According to Bank of America, U.S. investors have saved about $250 billion since 1993 by choosing ETFs over traditional mutual funds, mainly due to lower fees and tax advantages. On average, the expense ratio for U.S. ETFs is 0.16%, compared with 0.44% for mutual funds.
Not all news is positive, however. A recent study found that more than 78% of ETFs fail to cross the $1 billion mark, which is often considered the threshold for long-term survival. These small funds face problems like low liquidity, higher costs, and weak performance.
In Australia, ETFs are also booming. By March 2025, Australian ETF assets had climbed to $242.5 billion, up 26% from the previous year. Millennials, in particular, are driving this adoption.
ETFs usually hold a wide mix of securities, such as stocks, bonds, or commodities. This basket approach allows investors to spread their risk. For example, buying one ETF tracking the S&P 500 gives exposure to 500 large U.S. companies instantly. This is far easier than purchasing each stock individually.
One of the biggest advantages of ETFs is their low cost. Average expense ratios are just 0.16%, which is much lower than the 0.44% charged by mutual funds. With many brokerages offering commission-free trades, ETFs are often the cheapest way to gain market exposure.
ETFs have a special creation and redemption process that reduces capital gains distributions. This makes them more tax-efficient than mutual funds. Since 1993, investors have saved an estimated $250 billion in taxes and fees by using ETFs.
ETF providers disclose their holdings daily, allowing complete transparency. They are traded on exchanges throughout the day, meaning investors can buy or sell them just like stocks. This intraday liquidity makes them more flexible than mutual funds, which trade only at the end of the day.
ETFs now cover almost every type of asset. Investors can choose from broad market funds, sector-specific funds, thematic funds, actively managed ETFs, or even derivative-based income strategies. The growing popularity of options-based ETFs highlights the innovative nature of this industry.
ETFs have also made investing easier for younger generations. In markets like Australia, millennials are leading adoption, as they prefer low-cost and transparent instruments, especially during volatile periods.
Like any other investment, ETFs are exposed to market risks. If the market falls, ETFs that track those markets will also lose value.
Not all ETFs perfectly match the performance of their benchmark index. Differences in expenses, replication methods, or portfolio adjustments can cause tracking errors.
Popular ETFs usually trade with high volume and narrow spreads, but smaller ETFs often have low liquidity. This can make buying and selling expensive, as investors may face wide bid-ask spreads.
Some ETFs are narrowly focused on a single sector, theme, or even a handful of companies. This reduces diversification and increases exposure to specific risks. For example, a technology-only ETF will be highly affected if the tech sector faces a downturn.
Not all ETFs are simple. Many newer products use derivatives or complex strategies. A study showed that around 81% of ETFs fail to achieve meaningful scale and often suffer from high fees and poor performance. Choosing the wrong ETF can turn into a costly mistake.
Because ETFs trade like stocks, their market price may sometimes be higher (premium) or lower (discount) than the actual value of their underlying assets. This can cause investors to pay more or sell for less than the net asset value.
ETFs focused on specific themes, such as artificial intelligence or green energy, may carry extra volatility. Recent research suggests that AI-focused ETFs can act as transmitters of market risk compared to more stable assets like green funds or gold.
ETFs are best used as the foundation of a portfolio. Broad, low-cost funds tracking major indexes such as the S&P 500 or global equity markets provide stability and long-term growth.
More specialized ETFs, such as thematic or income-based products, can be added in smaller proportions to increase returns or diversify further. For example, gold and silver ETFs in 2025 delivered returns of 40% to 47%, proving their value as hedging instruments in uncertain times.
Model portfolios that mix active and passive ETFs, like those recently launched by Fidelity, show how investors can blend strategies in a structured and cost-efficient way.
The key is to focus on high-quality ETFs with strong liquidity, low fees, transparent holdings, and reliable issuers. This helps avoid the risks associated with small, complex, or illiquid funds.
ETFs have moved from niche products to central tools in global investment strategies. Their mix of low cost, diversification, liquidity, tax efficiency, and transparency has transformed how portfolios are built. With global assets expected to reach $25 trillion by 2030, ETFs are set to become even more important.
At the same time, investors must remain alert to risks. Illiquid funds, tracking errors, hidden costs, and concentrated themes can all reduce the benefits of ETFs. The best approach is to use large, diversified, and cost-effective ETFs as the portfolio core, while treating thematic and complex products as tactical additions.
In the end, ETFs offer both opportunities and challenges. With careful selection, they can provide stability, growth, and resilience, making them one of the most powerful tools in today’s investment landscape.