ETFs are Booming—Here’s What it Means for Your Retirement Plans

Exchange-traded funds (ETFs) have surged in popularity, with global ETF assets surpassing $15 trillion. These investment vehicles—which work like mutual funds but trade like stocks —have had seismic growth, more than doubling in total assets in just five years.

This is all well and good, but what does it mean for your retirement plans? If you are still relying solely on traditional mutual funds or individual stocks to build your nest egg, it may be time to rethink your strategy. More than 60% of U.S. investors now plan to buy ETFs, up dramatically from just 37% in late 2022. The reason? ETFs typically cost less than traditional mutual funds and offer more flexibility in how you can buy and sell them.

Key Takeaways

• The Vanguard S&P 500 ETF (VOO) made history in 2024 by attracting over $100 billion in inflows in a single year, the first time any fund has achieved this milestone.
• ETFs are becoming more prevalent in 401(k) plans, particularly through target-date funds.

What Are ETFs?

If you get what a mutual fund is, then an ETF is even easier to understand: it’s an investment fund that holds many stocks, bonds, and other assets, just like mutual funds, but can be bought like a stock in a brokerage account.

ETFs hold assets ranging from stocks to bonds to crypto to commodities, and many are designed to follow different investment strategies—high dividend yields, growth, overseas investing, etc.

Why This Matters for Your 401(k)

Your 401(k) is likely getting an ETF makeover, whether you realize it or not. The average 401(k) balance hit $132,300 in 2024, and ETFs are playing a bigger role in that growth.

Target-date funds, which automatically adjust your investments as you near retirement, are leading this ETF revolution in 401(k)s. These funds now hold about 29% of all 401(k) money, up from just 16% in 2014, and while you might not be directly investing in ETFs, your target-date fund manager almost surely is. By 2027, experts predict these funds will receive about two-thirds of all new 401(k) contributions.

Why does this matter for your retirement savings? ETFs typically charge lower fees than traditional mutual funds. Below is a table highlighting the differences among investing in stocks, mutual funds, and stocks.

Vanguard S&P 500 ETF (VOO)

The Vanguard S&P 500 ETF (VOO) made history in 2024 by attracting over $100 billion in annual inflows, the first time any single fund has reached this milestone in a calendar year. By year’s end, VOO had $101.1 billion in new investments, surpassing the combined inflows of its two closest competitors, iShares Core S&P 500 ETF (IVV) and the SPDR S&P 500 (SPY).

It’s not surprising, then, that a recent Investopedia reader survey found it the most popular choice of investors:

Bottom Line

ETFs have exploded in popularity, and that’s big news for your retirement savings. As more investors shift toward ETFs, traditional mutual funds are losing ground, and passive investing is taking center stage.

ETFs have plenty of benefits—they are comparatively easy to trade, can help lower your taxes, and hold assets for just about any strategy—but they still have their risks. If your ETF is in the wrong market or following the wrong approach, or the stock market drops as a whole, you’ll be in for volatility and a stressful ride. For retirement savers, it’s best to choose ETFs that align with your time horizon, risk tolerance, and income needs.