State Street hedges bets on next steps for ETF growth

Yasmine Raso

Senior Journalist, Financial Newswire

10 July 2025

They will continue to drive the “private-public” blur, the artificial intelligence (AI) theme will dominate flows and alternative investing will turn mainstream are just three of nine predictions made by State Street Investment Management on the next 24 months for exchange traded funds (ETFs).

The global ETF issuer’s ETF Impact Report 2025-2026 found the investment vehicle has made its way from humble beginnings as “synonymous with passive index tracking” to now having become “reliable portfolio building blocks”, as investor appetite continues to grow exponentially.

The report indicated that ETFs have expanded their reach across asset classes to meet this increase in demand from investors, but this is especially marked in relation to alternative investing.

“As investors seek both new return drivers and different ways to diversify risk, many are turning to alternatives in search of performance, but also protection. In fact, 51% of US investors agree that alternative investments provide effective downside protection during periods of market volatility,” the report said.

“And ETFs are expanding access to these once-exclusive strategies. More than half of US investors familiar with ETFs (51%) say ETFs provide an efficient, cost-effective way to invest in alternatives, and 46% say ETFs make alternatives more accessible to their portfolios.

“In many ways, alternatives are becoming less “alternative” as investors continue to look for asset classes and strategies that offer lower correlations, help diversify beyond stocks and bonds, and help manage risk. The traditional 60/40 portfolio isn’t obsolete, but it’s no longer the only path to risk-adjusted returns.

“So, where is the demand going? A variety of alternative ETFs have caught investors’ attention, including:

• Digital assets and transformative tech for next-gen innovation exposure
• Gold and other commodities for hedging, diversification, and appreciation
• Structured outcome-driven ETFs to help manage equity risk while still pursuing upside potential

“As new products continue to modernise the alternatives market, ETFs are playing a key role in democratising access to these once hard-to-access opportunities.”

The entrance of alternative ETFs on the mainstream stage was only one of nine key predictions made by the global ETF giant for the two years ahead, with the report’s forecasts also tracking the trends of outperformance experienced by gold and fixed income ETFs amid ongoing uncertainty and volatility.

The other predictions according to the report included:

1. The global ETF market takes in US$2 trillion in 2025: “If 2024 proved anything, it’s that investors hold ETFs in high regard — a sentiment supported by steady ETF industry growth year over year. In 2025, budding international adoption and demand from sovereign wealth funds could springboard the global ETF market to its strongest year ever — we predict global ETF flows will hit US$2 trillion by year-end. Riding last year’s record-setting US$1.48 trillion momentum, international ETF inflows could double, with regulatory advancements, expanded product offerings, and increased accessibility continuing to attract investors.”
2. Global gold fund AUM will crack US$500 billion by 2026: “Gold has long been a staple of portfolio hedging strategies, but its role is evolving. With persistent inflationary pressures, general economic uncertainty, and geopolitical risks mounting, many investors are increasing their allocations to gold. Gold ETFs have posted inflows of US$21 billion so far in 2025, bringing total AUM to US$345 billion — a sizable resurgence from a year ago. In addition to investor demand, banks are a major catalyst for growth in gold investing, especially in emerging markets, and have been net buyers of gold every year for the past 15 years.”
3. Global active fixed income ETF AUM will hit US$700 billion by the end of 2026: “Active fixed income ETFs have cemented their place in portfolios. Global active fixed income ETF AUM stands at US$350 billion, as of December 31, 2024. While US demand has been a primary driver, we anticipate non-US markets will propel the asset class’s next wave of expansion. Institutional investors across Europe and Asia are turning to actively managed bond ETFs as tools to deftly manage duration, allocations, and yield. As global central banks pivot from rate hikes to rate cuts, investors are re-evaluating bond positioning and leaning on active ETFs for real-time adjustments.”
4. Bank loan and CLO ETF AUM will overtake traditional high yield by 2026: “The search for yield never stops. Today, it’s leading investors away from traditional high-yield bonds and toward the relatively young but ever-expanding market of bank loan and
   collateralised loan obligation (CLO) ETFs. As of March 31, 2025, the former (US$118 billion) still has a sizable AUM lead over the latter (US$54 billion) — but not for long. The gap should diminish this year, as both institutional and retail investors with newfound market access turn to CLO ETFs. Thanks to generally higher credit quality relative to standard high-yield bonds, lower duration risk, and income-generating potential, securitised credit products are likely to play an even larger role in fixed income portfolios in 2025.”
5. AI will lead thematic ETFs to record flows in 2025: “In 2023, AI-themed ETFs stormed onto the scene, as excitement around generative AI reached a fever pitch. In 2024, the proverbial dam broke as investors sought exposure to the companies driving the next era of AI innovation. Now, in 2025, AI is rapidly assimilating across industries, uncovering new applications and efficiencies on what seems like a daily basis. Thematic ETFs, especially those centred on AI, are on pace to post record flows this year. Through February, thematics had US$2.4 billion of inflows — the largest two-month haul since 2021.56 Robotics and AI-focused ETFs have been primary drivers, pulling in approximately US$1.1 billion and easily outpacing other popular themes.”
6. More AI-powered ETFs will run on blockchain: “AI isn’t just an investment theme, it’s also changing the way investments are managed. Last year, AI-powered ETFs — those using machine learning models to support asset selection, risk management, and portfolio rebalancing — picked up momentum. While we certainly don’t expect robots to replace fund managers, integrating this sophisticated technology into portfolio construction and monitoring could offer efficiency benefits worth monitoring. As the underlying technology iterates and improves, we expect more of these products to launch in the near future.”
7. Private & public markets will blur thanks to ETFs: “Historically, the line between public and private has been indelible. The former being open and accessible, with the latter generally reserved for institutions and ultra-wealthy investors. Today, after plenty of scrubbing, the line doesn’t seem so distinct — in fact, it’s starting to blur. Unsurprisingly, the driving force of the private-public blur is growing investor demand. Millennials, in particular, are pushing this trend forward. According to the 2025 ETFs in Focus Study, 69% of millennials invest in alternatives, compared to 56% of Gen X and 46% of baby boomers. The generational gap is even broader in private markets specifically — 42% of millennials hold private assets, versus only 26% of Gen X and 17% of baby boomers. Advisers tend to see things similarly; allocating to alternatives is the top risk management strategy utilised by advisers, according to our survey. Moreover, eight in 10 advisers agree that alternative investments play a valuable role in long-term planning and  retirement planning strategies.”
8. Multi-share-class innovation will reshape retirement: “What if the retirement industry and everyday retirement investors could benefit from the same cost efficiencies and innovation driving the incredible growth of the ETF market? We predict the emergence of a dual share-class structure for managed funds and ETFs will bring many of the key advantages of ETFs to retirement savers, including defined contribution (DC) plan participants. While the widespread ability to invest directly in ETFs within retirement plans still faces operational hurdles, it’s broadly expected that the SEC will offer exemptive relief that allows a managed fund to offer a class of ETF shares, and ETFs to offer a class of managed funds shares. More than 50 investment managers have already filed for relief.”