What 25 Years of ETFs have really taught us

With over two decades of experience tracking markets and trends, David Stevenson is a seasoned financial writer who has spent much of his career challenging investment orthodoxies. Now joining Moneyfarm as a special contributor, he kicks off a new series by turning his attention to one of the most transformative forces in modern finance: exchange-traded funds (ETFs).

I’ve been writing about investments and portfolios for over 18 years for publications as varied as the Financial Times, Citywire, Investors Chronicle and MoneyWeek. I write about everything from private equity and investment trusts to macroeconomics. Still, if I’m honest, it’s the world of exchange-traded funds or ETFs that have attracted the most interest amongst my readers, to such an extent that I’ve even written not one, but two books on the topic. 

Put simply, ETFS have made investing in funds listed on the stock market cheap and easy to access. You can quite literally “buy the world” – or the world’s leading stock market indices, to be precise – in one fund for less than 20 basis points or 0.2% per annum in fund management fees (in this example, the ETF would track the constituents of an index called the MSCI ACWI benchmark). 

And yet, the ETF industry in Europe is only 25 years old. The first ETFs were listed on April 11, 2000. They were called the LDRS DJ STOXX 50 and LDRS DJ EUROSTOXX 50, and were sponsored by Merrill Lynch and listed on the Deutsche Börse. They were closely followed by the listing of the iShares FTSE 100 ETF on the London Stock Exchange on April 28, 2000. Already, we can see many characteristics of the investing revolution that was to sweep across Europe in the next 25 years: the endless acronyms in the titles signifying the major equity indices, such as the FTSE 100 and Stoxx 50 – still around – all introducing us to major institutions like Merrill Lynch (now part of Bank of America) and iShares (now part of BlackRock, which was then a Barclays Bank business).

Jump twenty-five years forward in time, and we can see that ETFs have had a profound impact, not least in the sheer amount of money invested in them. According to a consulting firm called ETFGI, in March of 2025, net inflows into ETFs in Europe totalled $28.63bn, bringing the year-to-date total to $99.04bn, the second highest YTD net inflows to date and the 30th month of consecutive net inflows.

At the end of March, US$2.40 trillion was invested in the European ETF industry. In total, the ETF industry in Europe now comprises 3,176 products, with 13,378 listings, from 124 providers listed on 29 exchanges in 24 countries. The value of ETF trading across Europe now regularly exceeds $5bn a day!

Ironically, according to one veteran observer, Chris Flood – formerly of the Financial Times and now at ETF-focused industry news outlet ETF Stream – the early progress in ETF adoption was painfully slow. He observed that “adoption rates started to accelerate in the mid-2000s as doubts spread about the performance of active managers and questions about value for money and the importance of costs on performance became a greater focus of investors’ attention for investor”.

ETFs have also drastically changed in look and feel since 2000. In those early days, most big funds invested their clients’ money in easy-to-understand big stock market equity indices like the FTSE 100 or the European Stoxx 50 index. 

If we switch back to ETFGI’s numbers for March of this year, the picture changes radically. The biggest winners were ETFs that tracked bond indices – fixed income ETFs reported net inflows of $93.07 million during March. Commodity trackers, also known as ETCs (exchange traded commodities) were another big winner, taking in $1.2bn in fund flows while an upstart collection of ETFs – active ETFs – attracted sizable net inflows of $3.6bn during March.

Both active ETFs and commodity ETCs demonstrate how these funds have moved beyond their origins in broad equity indices: with commodities, many funds now track the spot price and hold actual physical reserves of, say, gold, while active ETFS are in essence actively managed equity and bond funds that don’t even track an index.

That last point about active ETFs might confuse readers with a basic understanding of ETFs. ETFs Mark 1 were not complicated creatures like today’s active ETFs. These first-generation ETFs invested in all the constituents of a broad index – like the FTSE 100 or S&P 500 – and packaged them into a fund whose shares could be traded in real time on a stock exchange, with transparent bid-offer pricing. They charged a modest tracking fee, typically well below that of actively managed funds – almost always under 100 basis points, or 1% per year.

You can already see why ETFs might be popular: they could trade on exchange in an instant, unlike unit trust funds that could trade at the end of the day, they were cheap (low fees), and they provided broad diversification, tracking big, well-known indices. All that was needed was for the internet to come along, revolutionise share dealing and allow investors to buy and sell at the click of a button.

But over time, ETFs have changed and adapted, while still keeping hold of those simple democratising principles. Bonds have become popular, as have commodities, where many funds are now invested in what are called physical portfolios, i.e actual gold bars stored in a vault. The clever engineering behind ETFs – particularly their ability to create new shares on demand through third-party traders known as authorised participants (APs) – has allowed the ETF structure to evolve, now accommodating even active, stock-picking fund managers.

So, let’s step back and deconstruct the great ETF revolution. Like all huge, market-changing events, it involves the usual mix of hard, market-competitive truths and a handful of myths that need dispelling.

Truths about ETFs

One reason low-cost, index-tracking ETFs gained early popularity in their original passive form is a principle long recognised by academic economists: markets are mostly efficient, making it hard for fund managers to consistently outperform. Huge ecosystems like stock markets thrive on change, chaos and narratives. There’s a constant back-and-forth process about how the market adapts to information, which can initially seem random when seen in the share price ticking up or down.

But there is a simple truth in the way markets price stocks and bonds – most of the time, the market gets it right and efficiently prices a security. That makes it difficult for clever star fund managers to out-think the chaos and randomness of the market. It’s not impossible to ‘beat the market’, but study after study has shown that most stock and bond pickers, aka fund managers, end up lagging behind the ‘market’. 

Not that any of this stops individual and institutional investors from trying to ‘beat the market’ – all too frequently by speculating on individual stocks. This can be occasionally satisfying and often exciting, but the hard truth is that if you want to manage both reward and risk, a fund makes more sense as a diversified strategy. Take Nvidia. It’s clearly a leader in AI, but if you bet everything on Nvidia for AI, you might miss tomorrow’s Nvidia. An AI tracker fund, by contrast, might invest in Nvidia but also probably won’t miss the next champ because it’s diversified.

If a fund is a smarter way to buy exposure to big ideas and prominent trends, why not make sure you can invest in real time, minute by minute, on a stock exchange via a dealing app, with real-time pricing and low costs (called total expense ratios), i.e., an ETF? The vast majority of leading ETFs by assets under management now charge fees below 0.25%, while most actively managed unit trusts still have annual charges exceeding 0.50%.

There’s also one other hard truth. If you want to invest in, say, a basket of diversified Italian equities, or US 10-year Treasury bonds, or a hoard of physical gold in Switzerland, you can’t use a unit trust or a stockmarket investment trust. Only ETFs – and ETCs – give you that huge, broad choice. 

In that last sentence, I pointedly mentioned investment trusts. In the UK, stock market–listed funds known as investment trusts allow investors to access a wide range of alternative assets. They trade in real time and, by and large, have reasonable expenses – though not cheaper than ETFs in the vast majority of cases. These actively managed funds can be a wonderful financial instrument, but they have a flaw built into their engineering. They can easily end up trading at a discount – and less often, at a premium – to their total value, called the net asset value. If that discount persists, you can be invested in a fund worth less than the sum of its parts.

ETFs, by contrast, don’t have this problem because they are engineered in such a way that if the fund invests in a basket of liquid securities (equities, bonds) they can almost instantly be used to create or redeem new units – via those APs I mentioned earlier. it’s a complex process that we don’t need to go into here, but it means that other than in exceptional circumstances, no ETF should trade at a big discount (or premium) to the total value of its assets, unlike investment trusts.

So, add it all up: ETFs are cheap, easy to understand, cleverly engineered, useful for diversification, easy to trade in an instant and easily accessible. These hard truths have made ETFs hugely popular.

Myths about ETFs

Despite these competitive advantages, ETFs have accumulated some myths that need dispelling over the last two and a half decades. Take the passive is a massive idea, which implies that ETFs are a passive revolution.

Passive investing is the earlier idea that markets are efficient, most of the time, and that you may as well passively track an index or benchmark and avoid active stock pickers. That’s still true, but it’s important to understand that a massive amount of passive money is invested in index mutual funds or unit trusts, i.e, not ETFs. These index-tracking mutual funds look and feel like ETFs, but they are old-fashioned, end-of-day pricing unit trusts. They are brilliant ideas for cheap, diversified, passive investing, but they are not ETFs. 

By contrast, many ETFs are now actively managed rather than passive. These active funds have used the clever engineering behind ETFs and adapted them to what looks and feels like an old-fashioned actively managed unit trust. So, remember, although most ETFs are passive, not all ETFs are passive.

The next myth is that you can use the ETF wrapper for every asset class. You can certainly try, but it’s accepted wisdom among most market observers that less liquid securities, like small-cap stocks or even micro-cap stocks, are not easy to track, buy or sell via an index. In fact, there are many asset classes, such as private equity or structured finance, where many critics believe that ETFs are not an appropriate fund vehicle. 

Let’s take one concrete example: investing in property. Many ETFs invest in real estate investment trusts, where the shares can be bought and sold instantly. However, you’d never see an ETF – one hopes – that invests in actual commercial property buildings. Shares trade in real time, but office blocks take months to transact. There’s what’s called a liquidity mismatch here! So, this suggests our next myth buster: not everything can be turned into an ETF.

Our next myth is that not all indices and not all ETFs are created equally. They may all share obscure acronyms in their titles and sound very similar, but there are important differences. In the world of indices, some are, in my view, next to useless. These include the Dow Jones Industrial Index (DJIA) and the Nikkei 225, both of which are, in most experts’ view, dreadfully constructed and to be avoided at all costs. For the nerds amongst you, unlike most major benchmarks which weight stocks based on their market capitalisation, these two indices weight the stocks in the index based on their share price.

Individual ETF charges vary enormously, and investors should also watch out for the tracking error, which can also vary enormously. The tracking error is the difference over time between the fund’s return and the return from the index. These tracking errors can be very substantial.

That leads me on to another myth when it comes to choosing individual ETFs. I’ve lost count of the times when I see investors go, “I’ll just buy the biggest, cheapest, most well-known ETF and be done with all the choice and different ETFs” – as if, in the world of ETFs, bigger automatically means better. By biggest, they usually mean the largest assets under management by fund. It is undoubtedly true that when it comes to trading, a large ETF based on AuM will have more liquidity for day-to-day trading and all things being equal, more liquidity reduces trading costs via a tighter bid-ask spread. But that previous point is relevant. Sometimes the biggest and most liquid ETF is not the cheapest nor does it necessarily produce the smallest tracking error.

I’ll finish my myth-busting with one especially egregious myth – that ETFs allows investors to allocate between big asset classes cleverly and dynamically. Some professionals are great asset allocators, who can dynamically move between, say, US equities and bonds. Some of these managers work on platforms like Moneyfarm or work for fund managers. But it’s a damned tough job, and I think trying to make sense of big macro-economic trends or themes is tough, hard work and frequently you’ll get it wrong. ETFs encourage investors to think they can do it, and most of the time, they can’t. Leave top down asset allocation to the professionals, or at the very least just work out an asset allocation for your portfolio for the next ten years and stick with it… and forget about the news.

The future of ETFs

ETFs have come a long way in just 25 years, and I think there’s a good chance they’ll continue to grow at their current rate, especially as more investors choose to go online and manage their own financial future via apps and the internet. 

Analysts at JP Morgan predict that assets in European ETFs will reach up to $6trn by the end of 2030, which, if achieved, would represent truly extraordinary progress over just three decades. “ETFs are the future. Asset managers have to ask themselves if they want to be part of that future,” says Jon Maier, chief ETF strategist at JP Morgan Asset Management.

In my view, Europe is destined to follow the direction of travel in the US, where ETFs and index-tracking mutual funds collectively dominate the majority of investors’ portfolios. As their power grows, you’ll also see innovative new ideas, more active ETFs, and, sadly, more foolish ideas, like putting illiquid securities into an ETF wrapper.

Many younger individuals are now addicted to investing online, and as they mature and learn from experience – and plenty of mistakes – I confidently predict they’ll shift away from speculative single-stock memes to more diversified funds, especially ETFs. ETFs have been and will continue to be at the forefront of a great democratic revolution in investing.