Year in review: 2024 ETF predictions report card

With Thanksgiving in the books and a new year right around the corner, this is the perfect time to reflect on the past year. Per the industry rules of any end-of year exchange-traded funds (ETF) column, I must first mention ETF tax-loss harvesting (Brazilian and South Korean ETFs would be leading candidates!) and then can offer a report card on my ETF predictions from last year.

I have once again had a blast writing these articles and always appreciate the kind feedback. Looking back, I can only shake my head at some of the topics that were covered, and for the record, none of my readers dared me to make ETF analogies to baking turkeys or handling bathtime as a first-time parent. Yes, those were real columns from this past year. I presented the usual array of sports-related ETF content, including both fantasy football and my beloved Detroit Lions (please no more injuries!) I also tackled some misconceptions within the spot bitcoin exchange-traded product (ETP) arena, specifically regarding their premiums and discounts. The gears are already turning for next year.

But first, I need to grade the predictions from last year. My 2025 predictions will land sometime in early January.

Prediction #1: The launch of spot bitcoin ETPs will spur an investment boom into alternative products.

From last year’s column:

“Based on the size of the bitcoin market and that initial demand, we expected that pace of inflows to continue for three additional months before slowing down over the rest of the year, leading to our estimate of?more than $10 billion?in ETP inflows in 2024.”

The numbers (from Bloomberg) through December 12, 2024: Alternative ETFs/ETPs including those that hold crypto assets have added $45 billion.

Wow! I certainly underestimated the demand for spot bitcoin ETPs, which have seen net inflows of approximately $38 billion. Spot ether funds added an additional $2.3 billion of net inflows to that tally. That still leaves roughly $5 billion of new money added to alternative ETFs/ETPs. That amount feels poised to increase given some of the recent news around accessing private credit through the ETF wrapper.? ?

Looking back, there should not have been much doubt that ETFs/ETPs holding crypto assets would work as intended, giving investors exposure to spot bitcoin/ether in a transparent vehicle at prices that are in line with the real-time value of the underlying digital asset. Bitcoin ETPs really were the industry story of the year. More broadly, as ETFs become the vehicle of choice beyond stocks and bonds, I would expect adoption of alternative ETFs/ETPs to only increase in the future.

Grade: A-

Prediction #2: The launch of spot bitcoin ETPs will also spur investments into thematic ETFs

From last year’s column:

“Given the previous strong interest in thematic ETFs and the introduction of bitcoin ETPs to the market, our expectation is that 2024 would see a return to inflows at double the inflows seen in 2022. As such, I see a combined?US$5 billion?of inflows into thematic ETFs.”

The numbers through December 12, 2024: Thematic ETFs had $6.6B of outflows in 2024.

Doh! Even with exciting themes like artificial intelligence top of mind, these funds could not quite capture investor’s attention, which is a shame since many of these strategies had fantastic years performance-wise. Back to my first prediction, maybe bitcoin ETPs sucked up all the oxygen in the room, leaving little room for thematic investing.

I would not be surprised if investors give thematic ETFs a closer look once digital asset offerings become more mainstream. But sadly, for me that was not the case in 2024.

Grade: D

Prediction #3: Established active managers will continue to dip their toes into the ETF waters

From last year’s column:

“Lost in the share class discussion last year, a third option began—established managers launching unique and differentiated strategies in the ETF format.” ?

I did not give an exact number for this prediction. However, I present two stats from 2024:

• Of the $1.04 trillion of net inflows into ETFs through December 12, 2024, active ETFs represented $281 billion (27%).[1]
• Out of the 675 funds launched, 527 (78%) were active strategies.[2] ???

2023 was the first year when active ETFs grew to comprise a meaningful percentage of net inflows within the industry at roughly 25% (of $600 billion net inflows). That percentage increased to 27% even with the overall industry adding more than $400 billion of net new money compared to the prior year. Since the ETF Rule was adopted, investors have come to realize that all operational efficiencies of index ETFs now also apply to active strategies. Furthermore, many of the strategies launched after the ETF Rule was passed are now reaching three- and five-year track records. I do not think this trend is going to change any time soon.

Grade: B+

Prediction #4: My non-ETF predictions

2024 Super Bowl Winner – Detroit Lions (lost in conference championships)

2024 NBA Champion – LA Clippers (lost in first round of playoffs)

2024 MLB Champion – Atlanta Braves (lost in first round of playoffs)

2024 NHL Champion – Edmonton Oilers (lost in Stanley Cup finals)

2024 Best Picture – Oppenheimer (correct)

2024 Highest Grossing Movie – Deadpool 3 (finished second behind Inside Out 2)

2024 Album of the Year – Midnights (correct)

Not terrible. The movie and music predictions were much better than my sports ones, but the Lions and Oilers did make it quite far in the playoffs.

Grade: B-

I hope everyone has a wonderful holiday break—wishing you a happy new year! ?

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WHAT ARE THE RISKS?

All investments involve risks, including possible loss of principal.?The value of investments can go down as well as up, and investors may not get back the full amount invested.?Generally, those offering potential for higher returns are accompanied by a higher degree of risk. Stock prices fluctuate, sometimes rapidly and dramatically, due to factors affecting individual companies, particular industries or sectors, or general market conditions. For actively managed ETFs, there is no guarantee that the manager’s investment decisions will produce the desired results.

ETFs and ETPs trade like stocks, fluctuate in market value and may trade above or below the ETF/ETP’s net asset value. Brokerage commissions and ETF/ETP expenses will reduce returns. ETF/ETP shares may be bought or sold throughout the day at their market price on the exchange on which they are listed. However, there can be no guarantee that an active trading market for ETF/ETP shares will be developed or maintained or that their listing will continue or remain unchanged. While the shares of ETFs/ETPs are tradable on secondary markets, they may not readily trade in all market conditions and may trade at significant discounts in periods of market stress.

The Bitcoin/Ethereum ETPs? registered?under the Securities Act of 1933, which have been discussed, are not an investment company registered under the Investment Company Act of 1940 (1940 Act), and therefore are not subject to the same regulatory requirements as mutual funds or ETPs registered under the 1940 Act.?The Bitcoin/Ethereum ETPs are not a commodity pool for purposes of the Commodity Exchange Act (CEA) and accordingly are not subject to the regulatory protections afforded by the CEA.

Bitcoin/Ethereum ETPs hold only bitcoin and cash and are not suitable for all investors.?Bitcoin ETPs are not a diversified investment and, therefore, are expected to be more volatile than other investments, such as an investment in a more broadly diversified portfolio.?An investment in Bitcoin/Ethereum ETPs is not intended as a complete investment plan.

An investment in Bitcoin/Ethereum ETPs?is subject to market risk with respect to the digital asset markets. The trading price of the bitcoin/ether held by the Fund may go up and down, sometimes rapidly or unpredictably. The value of the Bitcoin/Ethereum ETP’s Shares relates directly to the value of bitcoins/ether, which has been in the past, and may continue to be, highly volatile and subject to fluctuations due to a number of factors. Extreme volatility in the future, including substantial, sustained, or rapid declines in the trading prices of bitcoin/ether, could have a material adverse effect on the value of the Shares and the Shares could lose all or substantially all of their value.

Competitive pressures?may negatively affect the ability of Bitcoin/Ethereum ETPs to garner substantial assets and achieve commercial success.

Digital assets represent a new and rapidly evolving industry, and the value of shares of Bitcoin/Ethereum ETPs depends on the acceptance of bitcoin. Due to the unregulated nature and lack of transparency surrounding the operations of digital asset exchanges, which may experience fraud, manipulation, security failures or operational problems, as well as the wider bitcoin market, the value of bitcoin and, consequently, the value of the Shares may be adversely affected, causing losses to Shareholders.

Digital asset markets in the US exist in a state of regulatory uncertainty, and adverse legislative or regulatory developments could significantly harm the value of bitcoin or the Shares of Bitcoin/Ethereum ETPs, such as by banning, restricting, or imposing onerous conditions or prohibitions on the use of bitcoins, mining activity, digital wallets, the provision of services related to trading and custodying bitcoin, the operation?of the Bitcoin/Ethereum networks, or the digital asset markets generally.

The Index price used to calculate the value of the bitcoin/ether held by Bitcoin/Ethereum ETPs has a limited performance history and may be volatile, adversely affecting the value of the Shares. Moreover, the Index Administrator could experience system failures or errors. Errors in the Index data, computations and/or construction may occur from time to time and may not be identified and/or corrected for a period of time or at all, which may have an adverse impact on the Bitcoin/Ethereum ETPs and the Shareholders. A temporary or permanent “fork” could adversely affect the value of the Shares. Shareholders should not expect to receive the benefits of any forks or “airdrops.”

Bitcoin/Ethereum ETPs are?a passive investment vehicle and are not actively managed, meaning they does not manage the portfolio to sell bitcoin/ether at times when its price is high, or acquire bitcoin/ether at low prices in the expectation of future price increases. Also, Bitcoin/Ethereum ETPs do not use any hedging techniques to attempt to reduce the risks of losses resulting from bitcoin price decreases. Bitcoin ETPs are not leveraged products and do not utilize leverage, derivatives or similar instruments or transactions. Bitcoin/Ethereum ETP Shares are not interests or obligations of the Fund’s Sponsor or its affiliates and are not insured by the Federal Deposit Insurance Corporation or any other governmental agency.

The amount of bitcoin/ether represented by each Share will decrease over the life of the Bitcoin/Ethereum?ETPs?due to the sales of bitcoin/ether necessary to pay the Sponsor’s Fee and other Fund expenses. Without increases in the price of bitcoin sufficient to compensate for that decrease, the price of the Shares will also decline, and you will lose money on your investment in Shares.

Security threats?to the Bitcoin/Ethereum ETP’s account at the Custodian or Prime Broker could result in the halting of Fund operations and a loss of Fund assets or damage to the reputation of the Fund, each of which could result in a reduction in the value of the Shares.

If the process of creation and redemption of Creation Units encounters any unanticipated difficulties, the possibility for arbitrage transactions by Authorized Participants intended to keep the price of the Shares closely linked to the price of bitcoin/ether may not exist and, as a result, the price of the Shares may fall or otherwise diverge from NAV.

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[1] Source: Bloomberg.

[2] Source: Morningstar.