Exchange-Traded Funds (ETFs) have evolved from a mere experiment to a crucial tool in financial markets. By 2026, the total assets under management (AUM) in ETFs surpassed $20 trillion.

This article from ForkLog explores how these funds have transformed the investment landscape, served as a bridge to the crypto world, and why direct indexing is considered a new phase in capital management evolution.

The Mechanics of ETFs

ETFs are distinct legal entities that hold a portfolio of assets, which can include securities, commodities, derivatives, and cryptocurrencies, depending on regulatory laws.

Each share is backed by a portion of the fund's assets, allowing investors to invest in a portfolio without directly owning the underlying assets. For instance, purchasing individual S&P 500 securities requires significant capital and incurs additional costs. ETFs simplify this process: the management company creates a portfolio that mirrors the index, then issues shares backed by these assets. By buying one share, an investor gains fractional ownership in all 500 companies.

The price of an ETF typically aligns closely with the net asset value of the fund due to an arbitrage mechanism managed by large banks known as Authorized Participants (AP). Regular investors do not participate in this process.

If ETF shares trade above the value of the underlying assets, APs buy those assets on the market, exchange them for new ETF shares, and sell them on the exchange. This increases supply and balances the price (and vice versa).

Since manual management is rarely used, funds can keep fees at minimal levels—down to fractions of a percent.

Before ETFs, collective investments were conducted through mutual funds (similar to unit investment funds), which were vulnerable to pricing mechanics. The net asset value was calculated after the trading session closed, and shares could only be bought or sold once a day. During daily market fluctuations, investors found themselves trapped, unable to exit their positions. The market needed a tool that combined the reliability and diversification of a traditional fund with the agility of stocks.

In 1993, State Street Global Advisors launched the SPDR S&P 500 under the ticker SPY. Originally designed for rapid risk hedging by large institutions, the passive SPY fund became a favorite among retail investors and set the gold standard for future generations of ETFs due to its transparency, low fees, and intraday trading.

In the 2000s, the industry expanded beyond basic indices: BlackRock and State Street introduced sector ETFs for targeted investments—from gold mining (SPDR Gold Trust) to innovative medicine. Later, the concept evolved into actively managed funds, where returns were driven by a team of expert traders.

The U.S. Securities and Exchange Commission (SEC) long resisted the widespread approval of active ETFs. The issue stemmed from transparency rules: funds were required to disclose their portfolio composition daily. Managers categorically refused to do this, fearing competitors and speculators would copy their trades or bet against them.

The first actively managed ETF was approved and launched in March 2008. It was Bear Stearns Current Yield under the ticker YYY from the eponymous investment bank. It debuted on the exchange just days before the bank collapsed, becoming one of the first casualties of the financial crisis, and was urgently sold to JPMorgan Chase.

The market crash diminished trust in active ETFs, creating a trend towards ultra-low fees for passive strategies achieved by cutting costs on “live” traders. Broad market funds—VTI and VOO—began to amass trillions of dollars.

To survive in the price war and stand out against giants like Vanguard, providers began launching hybrid smart beta funds. Their compositions were based on specific criteria—such as low volatility or undervalued stocks. This was the first step towards active management, albeit still following algorithmic rules.

In 2019, the SEC finally approved rules for these “semi-transparent” ETFs, allowing managers to package strategies in a convenient format without daily portfolio disclosures.

Source: Morningstar.

By early 2024, the capital of passive funds in the U.S. surpassed that of active funds for the first time in history. Investors realized it was mathematically more advantageous to follow the market than to overpay managers attempting to outperform it. Despite this, active funds still account for about 10% of ETFs. In February 2026, growth reached a new high of $2.15 trillion.

Not Just the “Big Three”

By February 2026, there were 14,449 ETFs globally, with AUM totaling $20.46 trillion from 978 providers across 65 countries.

Source: ETFGI/Markets Media.

Today, the global ETF market is a clear oligopoly. Among hundreds of providers, three financial corporations control the lion's share of capital:

  • BlackRock (iShares family)—the undisputed leader of the industry with over $10 trillion in AUM. The acquisition of iShares from Barclays in 2009 is one of Wall Street's most successful deals. BlackRock is now a driving force in integrating digital assets (RWA, crypto ETFs) into traditional finance;
  • Vanguard, founded by index investing pioneer John Bogle, has a unique structure: it is owned by its own funds, meaning its investors. The company has historically undercut the market with ultra-low fees;
  • State Street—a pioneer in the industry and creator of the S&P 500 fund. The company maintains its leadership in institutional products and holds rights to the SPDR line.

This concentration of capital has made the “Big Three” the largest shareholders of nearly all publicly traded companies in the U.S., granting them significant influence in shareholder voting.

Top 10 ETFs by AUM. Source: ETF.com.

Among the top ten ETFs by AUM is a product not from the renowned trio—Invesco QQQ Trust Series I. In 1999, Invesco acquired PowerShares, gaining management rights over the fund tracking the Nasdaq-100 index. This turned out to be a “gold mine.” QQQ's assets constitute a significant portion of the company's overall business.

In April 2026, BlackRock and State Street launched an aggressive campaign against Invesco's position. They filed applications to launch their own Nasdaq-100 ETFs to strip the competitor of its long-held monopoly on this index.

Today, the industry has grown so much that ETFs are no longer just synonymous with “stock index funds,” but rather a universal, technological wrapper for various financial ideas.

In addition to management style, ETFs are classified by two main characteristics—underlying asset class and investment strategy. The first includes: stocks, bonds, commodities, and cryptocurrencies.

The second category includes funds with varying levels of complexity:

  • thematic. These focus on long-term macro trends, ignoring traditional sectors like AI, robotics, cybersecurity, and clean energy;
  • dividend or income. These specifically build a portfolio to generate maximum cash flow for investors;
  • leveraged and inverse ETFs for short-term aggressive trading. The former provide index returns with leverage (e.g., x2 or x3 on the S&P 500). The latter rise when the index falls, allowing investors to short the market;
  • options. The fund holds stocks and sells options on them. This limits the portfolio's growth potential but provides substantial current dividend yields exceeding 10% annually;
  • buffer. Funds with capital protection that aim to limit losses, for example, to 10% if the market crashes, but in return cap maximum gains (say, no more than 12% growth per year). These are popular among conservative investors during periods of high uncertainty.

Wall Street Embraces Blockchain Technology

The journey of cryptocurrencies to the stock market has been lengthy. The SEC consistently rejected applications for spot Bitcoin ETFs for ten years, citing a lack of oversight and manipulation risks.

In 2023, the situation changed dramatically: a court victory for Grayscale against the SEC and an application from BlackRock accelerated the integration of cryptocurrencies into traditional finance.

In January 2024, the SEC approved the first 11 applications for spot Bitcoin ETFs, accompanied by a record influx of capital. Bitcoin was recognized as a macroeconomic asset at the institutional level.

By summer of the same year, the range of crypto ETFs expanded to include funds based on Ethereum. To maintain the status of a commodity within exchange-traded products, providers had to make concessions and exclude staking from the fund structures. In October 2025, trading began for the first spot ETFs on Solana. A breakthrough was the integration of staking rewards directly into the fund structure.

Top 10 crypto-based ETFs by AUM. Source: ETF.com.

Unlike regular users who can buy tokens directly, crypto ETFs provide regulated access to digital assets through traditional exchange instruments and address several fundamental issues:

  • elimination of infrastructure risks. Investors do not need to manage seed phrases or build complex security architectures—this function is handled by licensed institutional custodians;
  • overcoming regulatory barriers. Conservative institutional investors are often limited in their authority and cannot directly purchase crypto assets on spot exchanges. However, they are not prohibited from acquiring securities on Nasdaq or NYSE;
  • tax optimization. In the U.S., purchasing ETFs through retirement and brokerage accounts offers significant capital gains tax benefits, which are not available with direct token ownership.

Financial giants have begun exploring the digital asset niche, and alongside the launch of crypto ETFs, they have been developing tokenization of real-world assets. While the first Bitcoin ETFs made Bitcoin the underlying asset of financial instruments, the latter transferred traditional values (bonds, gold, real estate) onto the blockchain.

Pioneering this direction was Franklin Templeton, which launched the Franklin OnChain U.S. Government Money Fund (FOBXX) in 2021—the first fund in the U.S. to utilize the Stellar and Polygon blockchains for transaction processing and ownership record-keeping. It invests in U.S. government bonds, but ownership records are stored on the blockchain. Investors can buy and transfer tokens 24/7.

In March 2026, the asset manager announced plans, in partnership with Ondo Finance, to release tokenized versions of its ETFs, which will be directly accessible through crypto wallets.

Top 10 RWA products by total assets. Source: RWA.xyz.

BlackRock took a similar step, launching a fund on Ethereum called BUIDL (BlackRock USD Institutional Digital Liquidity Fund). This allows institutions to earn yields on U.S. Treasury bonds directly within the crypto ecosystem.

On May 6, 2026, it was reported that Morgan Stanley was developing its cryptocurrency division. The company is preparing a tool for converting digital assets into ETF shares, as well as launching tokenized stocks.

Criticism and Direct Indexing

The rise of passive investing has attracted influential critics, including Scion Capital founder Michael Burry. As early as 2019, he described the influx of funds into ETFs as a negative factor:

“The passive investment bubble through ETFs and index funds, along with the trend of large-scale asset management, has left cheaper securities worldwide orphaned.”

The problem is that index funds allocate capital based on the market capitalization of companies. As a result, when investing in the S&P 500, a significant portion of funds goes to the largest tech companies—like Apple, Microsoft, and NVIDIA—due to their greater weight in the index.

Burry believes this algorithmic approach distorts pricing: market makers artificially inflate the capitalizations of monopolies, leaving promising small-cap companies without liquidity inflows.

The response to these structural issues has been direct indexing—the main conceptual competitor to ETFs. Instead of a single fund share, brokerage algorithms directly purchase micro-shares of the underlying index assets on the client's personal account. This addresses the issue of “blind” investing: the portfolio can be flexibly adjusted (manually excluding overvalued companies) and mathematically optimized for taxes through targeted sales of losing positions.

Direct indexing is ideologically close to the crypto market. The use of non-custodial wallets, decentralized exchanges, and programmable smart contracts for automatic rebalancing allows Web3 users to build their own “indexes” without losing control over their assets or paying fees to corporations.

However, for macroeconomic players and multi-billion dollar funds, the simplicity, familiar infrastructure, and colossal liquidity of traditional ETFs remain an unmatched priority.

Over three decades, ETFs have evolved from a technical experiment into a cornerstone of the financial system. At this stage, they have fulfilled their mission for Web3: becoming a legal gateway for liquidity flow from Wall Street into digital assets. The approval of funds for Bitcoin, Ethereum, and Solana has demonstrated the ability of conservative regulators to adapt to new technologies.

The transfer of government bonds and corporate stocks directly onto the blockchain eliminates intermediaries, providing the very liquidity and transparency that the creators of the first ETFs originally sought. However, their proliferation has created a paradoxical situation. On one hand, the tool has provided simple and legal access to the market. On the other, it has entered into fundamental contradiction with the values on which the blockchain industry was built: decentralization, lack of censorship, and independence from third parties.