North America is entering 2026 in a clear growth phase for the ETF industry. This is highlighted in the latest report from State Street, titled “2026 Global ETF Outlook: From Wrapper to Backbone.” The study explains that the U.S. ETF market entered 2026 “from a position of strength after two consecutive years of inflows exceeding one trillion dollars.” The use of ETFs continues to expand as investors and advisers increasingly turn to them to “gain liquidity, broad and thematic exposure, ease of access, and cost efficiency, all within a tax-efficient framework.”
In this context, the study focuses on three themes: the continued expansion of the ETF structure into new uses, the additional growth drivers for active ETFs, and the evolution of distribution dynamics.
New Frontiers
In its 2025 report, the firm analyzed the growth of defined-outcome ETFs and the increasing use of derivatives within these funds. This trend accelerated throughout the year, especially in options-based income strategies, covered calls, put options, and hybrid approaches, “reflecting sustained investor demand for yield and downside protection.” The report reveals that issuers “continue to support these strategies,” as demonstrated by Goldman Sachs’ acquisition of Innovator, a leading provider of defined-outcome ETFs.
The study now highlights that a new frontier is emerging: simplifying and democratizing access to structured products that were previously limited to private wealth or institutional channels. “Areas gaining traction include diversified cryptocurrency ETFs with multiple assets beyond bitcoin and ethereum, as well as ETFs linked to private markets; pre-IPO exposure; and automated covered call income strategies,” it notes, concluding that adoption of these more complex strategies “will depend on investors’ financial education.”
That said, the study acknowledges that managing capacity within this framework “is becoming increasingly difficult” as strategies grow in complexity. As a result, “significant questions arise regarding scalability and suitability.” Ultimately, “it will be up to ETF issuers to determine whether strategies with inherent capacity constraints are appropriate for broad public distribution.”
On the other hand, these more sophisticated strategies also give ETF issuers “the ability to charge a premium in a product known for its low cost”: actively managed ETFs have an asset-weighted average expense ratio of 42 basis points, while some complex strategies reach prices above 70 basis points.
According to the study, active ETFs have been a defining force behind the growth and innovation of exchange-traded funds, and this trend is expected to continue. “Active ETFs are at the center of the industry’s most important shifts, transforming product design, scale, and distribution,” the report states, identifying several areas that will drive growth in active ETFs across North America in 2026.
1. Mutual Fund-to-ETF Conversions: Conversions continue to be a powerful growth engine. In 2025, more than 50 conversions took place, another record, bringing the total to more than 170, with assets exceeding $125 billion. ETF issuers are finding ways to develop their ETF distribution strategies by leveraging assets they already manage internally. This momentum shows no signs of slowing: in a recent survey, 50% of ETF issuers indicated plans to convert at least one mutual fund into an ETF over the next 12 months.
2. Section 351 Exchanges: The growing use cases for the ETF wrapper also extend to wealth management through Section 351 exchanges. Under Section 351 of the Internal Revenue Code, investors can contribute securities to a diversified fund without triggering capital gains recognition, allowing wealth managers to act as external investment partners—something a newly listed ETF would require under a specific set of diversification rules. However, the structure is not without drawbacks, since, among other issues, “regulation surrounding Section 351 exchanges remains limited.”
3. Fixed Income: ETFs are particularly well suited to fixed-income investing. Bond characteristics and investor preferences create an advantage for active fixed-income management, which “provides flexibility to adjust duration, quality, and sector exposure” in a volatile interest-rate environment. The study notes that total inflows into fixed-income ETFs are growing, but active management is capturing a much larger share than ever before: approximately 42% of all inflows into fixed-income ETFs went into active management in 2025, compared with only 6% in 2022. Here, the report identifies two converging forces: the narrative around active fixed income resonates with investors, and the ETF market now offers solutions across core, tactical, and manager-driven exposures.
4. ETF Share Classes: The ETF share class structure increases the variety and accessibility of these funds and will grow through the same channels as standalone ETFs. The report explains that although there is potential for a major shift from mutual fund share classes to ETF share classes, this is unlikely to happen this year.
The New Era of ETFs
ETFs are one of the dominant investment vehicles in North America, offering lower costs, tax efficiency, liquidity, and ease of use. They are also highly popular among younger investors: on average, ETFs represent 30% of millennials’ portfolios, 26% for Generation X, and 21% for baby boomers. Surveys point to a further increase of 20% or more in ETF portfolio allocations across all demographic groups, with a 31% increase among Generation X.
From advisers’ perspective, the outlook is also positive for ETFs. Most ETF assets in the United States are currently distributed through financial adviser channels. Intermediary platforms, such as registered investment advisers (RIAs) and large brokerage firms, hold significant ETF positions, driven by advisers’ preference for these funds and the growth of fee-based advisory models.
Digital distribution is also accelerating. PwC identified “digital takeoff” as a key trend for global ETF distribution heading into 2026, expanding access to younger, digitally native investors. The study concludes that, when broadening the perspective, “product development, systems, and advice are aligning with and anticipating these generational trends.”
