“Expanding funnel of opportunity”: What investors can learn from 25 years of ETFs

“Don't forget, 25 years ago most Australians were scared of the share market,” says State Street Investment Management Head of Investments Jonathan Shead.

“In fact, if you go through some older Australians’ holdings, you'll still find demutualisation shares that they haven't yet transferred into a broking account to allow them to sell. That was people's experience: AMP or maybe they subscribed to Telstra. But actually trading on the share market is just something scary that only brokers in sharp suits did.”

Shead was involved in the launch of the first ETFs in Australia in August 2001: State Street SPDR S&P/ASX 200 ETF (ASX: STW) and State Street SPDR S&P/ASX 50 ETF (ASX: SFY). At an event at the ASX celebrating their 25th anniversary, he said that since the initial launch there has been an “expanding funnel of opportunity” for investors.

“Those early ETFs were classic, own the whole market,” Shead says.

“It was a very professional broker-dominated market and that has slowly morphed into something that was adopted by the financial advice community, and that has now filtered down to everyday mum and dad investors.”

Low-cost, liquid and transparent

Among the most important factors that helped set ETFs apart from existing investment options, Shead says, were the cost, transparency and liquidity. When State Street launched STW, it had a fee of 28.6 basis points, which was a “rock bottom cost”, yet sounds expensive now that the fee is just 5 basis points.

“I think transparency in ETFs has been one of the things that has helped promote their growth. ETFs publish the holdings in their portfolio every day,” he says.

“25 years ago, you might get a summary report once a month, or maybe in some cases once a quarter, that was it. All of a sudden, we're showing the whole market what's in our portfolio every day.

“When I first joined the industry, quite a few more than 25 years ago, there were managed funds that only priced once a month, and you could apply for the deemed units once a month.”

Changes in the financial advice space have been part of that story. When ETFs launched, it was a landscape dominated by managed funds and financial advisers were largely paid via commission - something that is now banned. Watching that change, Shead says, has been “really exciting”.

“To have a product that provided such low-cost market exposure that didn't pay a commission required some significant changes.

“I remember doing road shows with advisers, and the first question was usually, ‘What's the trailing commission?’ It was actually a fair enough question, but of course, ETFs don't pay commission. It required the advice community to rethink what they were doing.”

Alongside some advisers who were already ahead of the curve and working on a fee-for-service, there were also what Shead terms “savvy retail investors” who looked at the expense ratio and saw the opportunity.

“I think the change in the financial model for the advice industry, the move from commissions to fee-for-service, new asset classes, particularly international equities, and then subsequently bonds, really provided a ramp up in assets.”

ETF explosion

“I think in the early stages, I certainly hadn't got as far as thinking about what happens when this product category expands, and I think that funnel of opportunity has expanded as technical innovations within the retail industry allowed things like other asset classes, other geographies, other time zones to be traded,” Shead says.

Part of the driving force behind the growth, he adds, has been brokers and market makers overcoming the barriers to these innovations, as well as competition in the space and access to international markets.

“I think international ETFs really signalled the ramp up because it was one thing to have an Australian equity product that matched up against futures and allowed for arbitrage and all those wonderful technical nerdy things, but to be able to trade the US market and settle in Australian dollars in an Australian time zone was transformative,” Shead says.

Beyond the growth in the Australian market, global inflows cracked US$2 trillion 1n 2025 and total ETF assets under management hit US$18.21 trillion, according to figure’s in State Street’s ETF Impact Report 2026-27. Projections also keep climbing higher, with US$60 trillion AUM within a decade well and truly on the cards.

Global ETF AUM growth is outpacing our original expectations by 18% (US$, trillion)

Tokenisation and always on trading

Looking forward, Shead points to an increase in actively managed products landing on exchanges, despite the value of passive management being among the early benefits of the ETF structure.

“We spent a lot of time educating on active versus passive management. Now the arguments 25 years ago have not changed much to what the arguments are now and, for the record, we believe in both admin and passive management. But the benefits of passive management were not well understood in the broader market at the time,” Shead says.

Looking globally, active ETFs represent roughly US$2 trillion in global AUM, while active managed funds stand at roughly US$30 trillion. However, active ETFs are already capturing 31% of all ETF flows, as investors increasingly turn to them for their lower cost, tax efficiency, and transparency.

The migration from managed funds to ETFs is gaining momentum

"We believe global active ETF assets will surpass traditional active management for the next 25 to 30 years. That's going to involve a lot of innovation, especially in active space, and we think innovation will continue to characterise the industry," Shead says.

“It might not be in the next five years, but certainly before the next 25, we will see tokenised funds and trading 24/7. 

"That is going to be revolutionary because you don't have to wait overnight. A broker doesn't have to guess what the US market is going to do, and you can actually have a tokenised product that trades 24/7. That I think will be the biggest innovation in the next 5-10 years.”

What can investors learn from 25 years of ETFs?

#1 - The value of compounding

Regardless of the ups and downs over the last 25 years, if an investor had put $1,000 in STW when it launched, that investment would now be worth $6,948.81. That’s pretty good right off the top, but what happens if the investment didn’t stop with a one-off sum? Adding an extra $100 each month over the course of 25 years bumps that total up to $99,917.

“Trying to sidestep volatility often means sidestepping the recovery too, and those recoveries have historically driven a disproportionate share of long run returns.”

#2 - An easy path to diversification

The first rule of investing is one that gets hammered home constantly: diversification. ETFs are one of the easiest ways to nail that brief, with a single product able to provide exposure to a broad array of companies across a range of sectors. According to Park, this remains one of the “most enduring appeals” of ETFs.

“Because indices are typically weighted by market capitalisation, they naturally evolve as the economy changes, allowing investors to participate in the growth of leading companies without needing to make ongoing portfolio decisions.”

#3 - Fees also compound

When researching an investment, the headline return is always going to be a draw. However, as Park points out: “Fees are one of the few things investors can control.” The benefits of ETFs here are easy to see, with the cost sitting much lower than an actively managed fund.

“Over a 25 year horizon, even small differences in fees can compound into meaningful differences in outcomes. Keeping more of your return invested is a simple but powerful principle, and one of the reasons ETFs have grown so rapidly in Australia and around the world.”

As ETFs transition to include more active options, investors will need to ensure they keep an eye on the fees and not simply assume they will be as low as a passive ETF that tracks the index.

#4 - Find the core

Structuring a portfolio is about more than just picking a few shares and hoping for the best. As the ETF offerings available continue to grow, it allows investors to select a broad market ETF as the core of their portfolio that can be complemented with a range of more targeted investment opportunities. “Core and explore” rather than “spray and pray”.

“STW is a good example of this approach. Many investors use it as a core Australian equity allocation, building additional exposures around it to create a portfolio aligned to their objectives and risk tolerance,” Park says.