The 2025 ETF Mailbag

Episode Summary

Executive Summary: This mailbag episode of Trillions explores the future of ETFs, with a skeptical-but-optimistic take on tokenization, strong confidence in ETF structure, and detailed discussion of profitability, active ETF growth, crypto ETFs, and where innovation may emerge next. The hosts argue ETFs remain hard to disrupt because they are cheap, tax-efficient, liquid, and trusted by investors.

Main Topics: ETF share classes and the next structural innovation (Priority: 5/5): Eric identifies the mutual fund-to-ETF share class as the biggest near-term structural change, enabling mutual funds to add ETF sleeves and letting investors move assets more tax-efficiently. Athanasios agrees this is the most meaningful innovation currently near adoption. Tokenization as a limited disruptor (Priority: 5/5): The discussion centers on whether tokenized stocks and ETFs can meaningfully improve investing. The group concludes tokenization may streamline back-office functions and settlement, but likely won't replace ETFs for developed-market investors because current ETF access is already fast, cheap, and convenient. ETF profitability and business economics (Priority: 5/5): The hosts explain that ETFs are large in assets but comparatively low-margin versus mutual funds and hedge funds. They note that profitability varies greatly by product, with crypto ETFs and some leveraged funds standing out as unusually lucrative. Bitcoin and Ethereum ETF economics (Priority: 4/5): The episode highlights the strong early economics of spot Bitcoin ETFs, especially BlackRock’s IBIT, while noting that some Ethereum ETFs may struggle to be profitable at current asset levels and fees. Active, thematic, and multi-asset ETF trends (Priority: 4/5): The conversation distinguishes traditional stock-picking active funds from newer ETF categories like buffers, single-stock ETFs, and derivative-based products. The hosts say thematic funds can still attract assets, but are likely to remain a small slice of the market, and multi-asset ETFs remain niche outside 401(k)s. ETF structure, taxes, and closures (Priority: 4/5): A clear explanation is given for creation/redemption mechanics and why ETFs are tax-efficient. The hosts also discuss how ETF liquidations work, why they happen, and why closure risk matters mainly because of taxes and inconvenience rather than principal loss. Long-term outlook for ETF innovation (Priority: 4/5): The episode closes with a view that the ETF market will keep expanding through experimentation in less-liquid or unconventional assets, but core low-fee vanilla ETFs should continue to dominate globally.

Key Arguments: The ETF share-class structure is the most important near-term innovation because it lets mutual funds adopt ETF share classes and improves tax efficiency without forcing investors to realize gains. Tokenization may improve settlement speed and back-office efficiency, but it does not yet offer enough user-facing benefit to displace ETFs in developed markets. The current ETF ecosystem is already extremely convenient: investors can buy diversified exposure quickly, cheaply, and with strong liquidity through standard brokerage apps. ETFs are large in assets but relatively low-margin products compared with mutual funds and hedge funds, which helps explain why ETF issuers compete aggressively on fees. Spot Bitcoin ETFs are an exception to normal economics: they are profitable quickly because of strong demand and still-low fees versus prior crypto investing options. Traditional active ETF products are growing partly because they have become cheaper, while much of current “active” ETF flow is actually in buffers, derivatives, and single-stock strategies. Thematic ETFs can still succeed, but their flows are cyclical and concentrated in hot themes; they are unlikely to become dominant. ETF creation/redemption is tax-efficient because shares are exchanged in-kind rather than through taxable cash sales. ETF closures typically give shareholders notice and liquidity, but can still trigger taxable events if positions are sold or redeemed. The ETF market in the U.S. is mature, so future growth is likely to come from overseas markets and from unusual or less-liquid product experiments.

Data Points: ETF industry assets: $11 trillion - Eric cites this as the approximate scale of ETF assets under management. ETF industry revenue: about $10 billion annually - Used to illustrate that ETFs are low-margin relative to their asset base. Mutual fund revenue: about $125 billion annually - Compared with ETFs to show mutual funds are much more profitable structurally. ETF share-class adoption: over 60 active managers have filed - Eric says many managers have filed for the mutual fund ETF share-class exception. Active ETF flows share: 40% of all ETF flows - Mentioned to show that 'active' is growing, though much of it is in buffers/derivatives rather than stock-picking. Thematic ETF inflows this year: $2 billion - Athanasios notes this is out of roughly $560 billion of total ETF flows. Total ETF flows: $560 billion - Used as the denominator when discussing thematic ETF flow share. Bitcoin ETF profitability threshold: about $80 million in assets - Athanasios estimates this would be needed for a 25-30 bps Ethereum ETF to be profitable; the speaker frames the threshold in the crypto ETF context. BlackRock IBIT ranking: 3rd most profitable ETF at BlackRock - Mentioned as a Bloomberg News data point; shows how quickly IBIT rose in profitability. IBIT age: about 1.4 years old - Used to emphasize how fast IBIT has scaled in profitability and asset gathering. IBIT potential to become most profitable: needs about $9 billion more in assets - Eric says that amount could make IBIT BlackRock’s most profitable ETF, depending on Bitcoin price appreciation. Vanguard S&P 500 ETF future dominance: at least 10 years - Eric predicts VOO/VU will remain king for a long time. ETF launch profitability example: 2X NVIDIA makes about $6 million a year - Illustrates that some leveraged or niche ETFs can be surprisingly profitable. BlackRock ETF count: 1,200 ETFs - Used when ranking IBIT among BlackRock’s ETF lineup.

Pivotal Quotes: "I think the ETF share class is coming out this summer probably, later this summer or early fall." — Eric Balchunas: On the next major structural innovation in ETFs. "I'm bullish tokenization as a back office, a disintermediator, but I'm bearish tokenization in terms of killing the ETF, at least for now." — Eric Balchunas: Summarizing his view that tokenization may help operations but not replace ETFs. "The reason ETFs were such a big hit is because mutual funds were slow, expensive, not that liquid, and a lot of the costs were internalized." — Eric Balchunas: Explaining why ETFs succeeded and why tokenization faces a much harder disruption test.

Implications: ETFs should keep winning on cost, trust, and liquidity, while tokenization remains a back-end improvement more than a front-end revolution. Expect more product experimentation, especially in crypto, private assets, and exotic wrappers, but core low-fee ETFs will still dominate.