Alternative ETFs crossed the $400 billion threshold in November, marking a dramatic evolution from their roots in commodities and real estate to become a rapidly expanding segment of the ETF marketplace, according to new research from Cerulli Associates.
The surge in alternative ETF assets, which have posted a 93% year-over-year growth rate to lead all ETF categories, comes as more financial advisors seek to diversify client portfolios beyond traditional stocks and bonds, according to the December 2024 issue of The Cerulli Edge.
Alternative ETFs amassed $82.2 billion in flows through the second quarter of 2024, surpassing 2020’s record of $64.8 billion, according to Cerulli’s analysis. The category’s market share increased from 2.7% in November 2023 to 3.8% in November 2024.
Digital assets, derivative income strategies, and defined outcome products are driving much of the growth, according to Cerulli’s report. This marks a shift from five years ago when commodities and real estate dominated with 65% of alternative ETF market share.
Cerulli’s research shows derivative income strategies have posted a three-year compound annual growth rate of 174% after nearly doubling in assets between 2022 and 2023, topping the Morningstar Category flow chart in 2023 with $26.4 billion.
The report found that 81% of financial advisors who allocate to alternative investments for moderate-risk clients report using ETFs as one of their preferred vehicles. However, adoption faces some headwinds, with 48% of advisors citing liquidity concerns and 44% pointing to transparency issues, according to Cerulli.
Major ETF providers are moving aggressively into the space, the report notes. Recent developments include the launch of spot bitcoin and Ethereum ETFs, as well as State Street’s partnership with Apollo to develop private market ETFs.
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Digital assets now represent the largest segment at $126.7 billion in assets, followed by leveraged equity products at $102.8 billion and derivative income strategies at $95.5 billion, Cerulli’s analysis reveals.
Portfolio diversification, however, remains the primary driver of alternative allocations, with 83% of advisors citing it as their top goal in Cerulli’s survey. However, overall alternative allocations remain modest at 3.6% of advisor portfolios, suggesting room for continued growth.
The category continues to innovate, with the number of alternative ETFs increasing to 1,060 in 2024, up from 827 in 2023 and 712 in 2022, according to the report.
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