Sizing the ETF Opportunity: Active ETFs Move to Center Stage

A new Citi Research report from a team of strategists led by Drew Pettit explores how the growth of U.S. Exchange-Traded Funds (ETFs) has exceeded the team’s most optimistic expectations, with the main driver organic inflows and not just strong risk-asset returns. Given this reality, the team now revisits its forecasting framework in its new Must C report, updating its aggregate projections for U.S. ETF assets under management (AUM).

A year ago, we laid out our roadmap to the next $10 trillion in U.S. ETF assets. Our core thesis was straightforward: ETFs would continue to take share from mutual funds as professional product innovation expanded access to more precisely engineered investment solutions. Central to that view was a slow burn battle for the core of asset allocation itself, where active approaches would begin to reclaim share from traditional index strategies.

We saw this shift as driven by growing awareness of the idiosyncrasies embedded in concentrated and widely followed equity benchmarks, pushing investors toward more differentiated, outcome oriented solutions. In fixed income and other asset classes, the story was already unfolding — index approaches often overlooked or underweighted entire segments that offered distinct return streams. Active ETFs benefited directly from this gap, especially as liquidity ecosystems improved, democratized access, and, in some cases, created entirely new investable universes.

In our early Must C research (see Sizing the ETF Opportunity: From Passive Revolution to Active Evolution), we highlighted ETF encroachment on mutual funds, particularly outside of defined contribution channels. Importantly, we never viewed this as simply another wave of passive adoption. Instead, we saw the ETF wrapper becoming the preferred vehicle for active differentiation across asset classes, strategy design, and newly accessible corners of the global opportunity set.

While those views were clearly bullish, the industry’s recent growth has exceeded even our most optimistic expectations, with this growth driven largely by organic inflows rather than just strong risk asset returns. Given this reality, we’re revisiting our forecasting framework and updating our aggregate U.S. ETF AUM projections.

These are our current scenarios:

• Base case: $25 trillion in 2030, $42 trillion in 2035. Growth continues but naturally decelerates as the industry matures, with a more balanced mix of flows and returns.
• Bull case: $32 trillion in 2030, $73 trillion in 2035. Overall growth rates resemble the past decade, with organic flows remaining the dominant driver alongside strong market performance.
• Bear case: $20 trillion in 2030, $23 trillion in 2035. New forms of investment funds or investment technologies disrupt the ETF industry, much as ETFs disrupted mutual funds. Growth is largely a function of returns, offsetting outflows in later years — a scenario similar to what we see with mutual funds today.

Recent annual U.S. ETF AUM have slightly exceeded our prior bull case. A modeling change reflects this: We now project flows as a percentage of beginning of year AUM rather than extrapolating monthly run rates, which better captures compounding effects in a larger industry.

Historically, U.S. ETF AUM has grown at a remarkable 20% annualized pace, with roughly 60% coming from flows. In our base case, we assume meaningful deceleration in flow driven growth as the asset base expands, combined with some minor deceleration in returns. That produces a more even organic inorganic growth split. In the bull case, flows continue to outpace returns as the primary contributor, even while acknowledging ETFs are no longer an early stage industry. In the bear case, the setup increasingly resembles today’s mutual-fund complex, with returns often offsetting negative outflows.

Over time, we expect flows as a percentage of AUM to naturally decelerate. Recent years surprised to the upside due to innovation across cryptocurrencies, collateralized loan obligations, and equity derivatives, aided by a more permissive ETF launch environment. When standardized by AUM, however, exponential dollar growth translates into a linear decline in flow intensity — exactly what we’d expect from a maturing industry. Our base case reflects the 10 year historical trend, excluding 2024 and 2025.

On returns, aggregate U.S. ETF performance has closely mirrored a globally diversified 60/40 portfolio, averaging 7.3% annualized during the past decade. That serves as the anchor for our assumptions: 6% in our base case, 8% in our bull case, and 4% in our bear case. These sit comfortably within long run historical distributions and imply some modest conservatism amid today’s valuation and rate environment.

Ultimately, our earlier forecasts proved conservative because flows, not markets, did the heavy lifting. By reframing growth in terms of flows relative to AUM, we arrive at higher — but we believe more realistic — long term estimates. To us, $25 trillion in U.S. ETF assets by the end of this decade looks clearly attainable, with more than $40 trillion plausible over the next 10 years as innovation continues within an increasingly mature industry.