By Alex Tapscott In less than two decades, exchange-traded funds (ETFs) have exploded from $1 trillion in assets under management to more than $10 trillion today and Bank of America forecasts a $50 trillion ETF market by 2030. Investors are drawn to ETFs because they offer the diversification of mutual funds with the liquidity of stocks, often at a lower fee. But that alone does not explain their success. At their core, ETFs are a financial technology that has democratized access to asset classes and strategies that were once difficult for most investors to reach. These include everything from municipal bonds to foreign stocks to stock options to private credit. By reducing barriers to entry and enhancing flexibility, ETFs have fundamentally changed how people invest. The success of ETFs should not surprise us. Financial innovations throughout history have followed a similar trajectory — improving access, reducing friction, and broadening choice, which in turn can create entirely new markets. Mutual funds (1924) allowed investors to pool their money together and invest in a portfolio of securities. The first charge card, the Diners Card (1950) enabled consumers to pay for goods without carrying cash, creating a massive market for consumer credit in the process. Discount brokerages (1975) opened stock trading to regular investors, while online banking and brokerages (1990s) made banking more convenient and more accessible for people with limited mobility or who lived in remote locations. Each of these technologies began at a small scale and took some time to penetrate their respective markets. ETFs were initially dismissed as niche products, perhaps suitable for a few DIY investors but not appropriate for advisors, traders, institutions, high net worth individuals or other major Wall Street players. While it’s true that ETFs began as index funds, today most ETF launches are for active strategies. According to BlackRock, active ETFs accounted for 76% of all U.S.-listed ETF launches in 2023, and 21% of global ETF inflows in the same year. The company expects active ETF assets under management to surge to $4 trillion by 2030, a more than four-fold increase from $900 billion today. The success of the ETF market is an example of Clay Christensen’s Innovator’s Dilemma. When new technology emerges, the incumbents in a market (in this case traditional asset managers, banks and brokerages) are often slow to embrace it, allowing disruptive innovators to get a critical head start. Their position is understandable, says Christensen. In the investing world, small-time DIY investors were initially the least interesting kind of customer. They didn’t have a lot of money to invest, were stingy about fees and therefore could be easily dismissed. That view was shortsighted. Incumbents misjudged the potential of the DIY segment to grow precisely because of technology innovations like ETFs (and online brokerages). And they misjudged ETFs as something that could have broad appeal. Christensen says that markets that do not exist can not be analyzed. ETFs created a $10 trillion market that did not exist before. The emerging market ate the old one. Tokens, like ETFs, have the potential to democratize finance further. When it comes to tokens, myths and misinformation abound. Often, all tokens are classified as “crypto” as in “cryptocurrencies.” This is unfortunate, as the term cryptocurrency is a misnomer. The fact is many if not most tokens are not trying to be currencies in the classical sense of a medium of exchange, store of value and unit of account. Rather, tokens are best thought of as simply containers for value. Think of a standard shipping container, which can contain everything from computers to car parts, potatoes to canned plums, and everything in between. These programmable containers can represent anything of value — stocks, bonds, art, intellectual property — just as a website can be “programmed” to contain any kind of information online, like a storefront, social media site, or government landing page. Tokens are also accessible to anyone around the world with an internet connection, and eliminate the need for many traditional intermediaries. Embedded technology like smart contracts can automate functions once handled by brokers, exchanges, and transfer agents, reducing both friction and fees. The first killer app so far for tokens has been U.S. dollars. Tokenized dollars, known as stablecoins, enable users the ability to move and store value in dollars and then deploy those dollars into a wide range of financial services, such as trading securities, depositing them in lending platforms to receive loans, or using them to invest in a new startup. Stablecoins today exceed $150 billion in circulating supply and process trillions annually in payments. Billions of people now have an easy way to own dollars. This is a breakthrough. Much like ETFs, tokens have the potential to create new markets (billions of people do not invest money in financial markets) and make financial products more accessible and customizable (tokens are infinitely programmable). As banks and competitors struggle to adapt to this new technology, early adopters will be positioned as the global leader. Incumbents will have no choice but to follow or partner with those pushing the financial frontier. Just as Wall Street juggernauts BlackRock, Vanguard, State Street and others grew into juggernauts on the back of ETFs, the next generation of financial powerhouses will emerge from the token revolution. But who are they? There are contenders but it still feels like anyone’s game. | 