In a bold forecast underscoring the growing influence of exchange-traded funds (ETFs) and the evolving landscape of digital assets, Eric Balchunas, Senior ETF Analyst for Bloomberg, has predicted that ETF assets are likely to reach $35 trillion globally by 2035. This projection, shared in a recent tweet, suggests a tripling of assets from the current $13 trillion.

Balchunas’ projection is based on a conservative estimate of a 10% compound annual growth rate (CAGR). This rate is notably lower than the past decade’s 17% CAGR and the 25% CAGR observed in the preceding decade, reflecting a more tempered outlook on market returns.

Key Drivers of Expected ETFs Growth

Several factors underpin this optimistic forecast. ETFs are lauded for their low costs, intra-day liquidity, tax efficiency, and flexibility—attributes that have consistently attracted investor cash and trading volume. Balchunas believes these benefits will continue to drive growth and innovation within the ETF market. He anticipates the development of new products, innovative designs, and an increase in sales efforts aimed at promoting ETFs.

Balchunas also points to structural changes overseas as a long-term advantage for ETFs, suggesting that international markets are becoming increasingly favorable to these investment vehicles. In the United States, mutual fund share classes are expected to add another stream of cash flow into exchange traded funds.

Digital Assets and Tokenization

The future growth of ETFs might also intersect with the rise of digital assets. Balchunas acknowledges the potential impact of tokenization—a process of creating digital representations of ETFs on a blockchain, the technology that underpins cryptocurrencies like Bitcoin. While some have predicted that tokenization could significantly alter the ETF landscape, Balchunas remains cautious. He notes that there are substantial regulatory hurdles and that the current frictionless experience of using traditional ETFs makes a compelling case for tokenization less urgent.

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Addressing potential threats to traditional ETFs, Balchunas dismisses concerns about direct indexing—a method where investors can directly purchase a customized portfolio of stocks rather than investing in a fund—as a significant challenge. Regarding tokenization, he suggests that while it could eventually benefit ETFs, the regulatory environment and the seamless experience of current ETFs are significant factors to consider.

Traditional ETFs to Remain Resilient Amidst Digital Asset Innovations

In response to a query about the potential disappearance of traditional ETFs by 2035, Balchunas clarified that while tokenized ETF could emerge, he disagrees with the notion that traditional exchange-traded funds will vanish. He reiterated the substantial regulatory challenges and the current ease of use as key reasons for his stance.

Balchunas’ forecast reflects a strong belief in the resilience and adaptability of exchange-traded funds, even as the financial landscape evolves to include more digital assets. The combination of investor-friendly features and ongoing innovation is expected to sustain robust growth in the sector.