Low-cost ETFs drive record $1T in inflows despite active fund buzz

The ETF industry is having its best year ever and the driver might not be what you'd expect.

In the first half of 2026, ETF inflows topped $1 trillion, putting the industry on pace to exceed $2 trillion for the full year. But amid all the excitement around active strategies and income-generating products, one in every two dollars that flowed into ETFs went into low-cost, core, passive funds; the kind of plain-vanilla exposure the industry was built on.

For Allison Bonds Mazza, Head of US Wealth at State Street Investment Management in Boston, those numbers tell an important story about what advisors actually believe in.

"While much of the industry conversation has shifted toward active and income strategies, low-cost core ETFs remain the foundation of how many advisors build portfolios," she said. "What that tells us is that investor priorities haven't changed as much as some headlines might suggest. Advisors continue to focus on broad market exposure, diversification, and cost efficiency as the starting point for client portfolios."

The $2 trillion question

The scale of 2026's ETF adoption is historic, but Bonds Mazza sees it as the result of structural changes that have been building for years.

"In a relatively short period of time, ETFs have evolved from a portfolio tool to the preferred investment vehicle for a growing number of investors and investment strategies," she said. "A key driver has been access."

She pointed to private credit as an example of how ETFs are expanding the investing universe. "In the past, access to private credit was largely limited to institutions and high-net-worth investors. Today, ETFs like the State Street IG Public & Private Credit ETF (PRIV) are helping make those exposures more accessible to every investor."

She also noted a political dimension reinforcing the low-cost ETF narrative. The Treasury Department's selection of SPYM – State Street's S&P 500 ETF – as the default investment for the new Trump Accounts program is introducing a fresh generation of investors to passive, low-cost strategies as a long-term savings vehicle.

"When you combine those structural advantages with ongoing product innovation, it's hard to see the ETF adoption trend slowing," she said. "I believe we'll continue to see advisors incorporating ETFs into more parts of the portfolio, not fewer."

Beyond the expense ratio

As financial advisors navigate a crowded ETF marketplace, Bonds Mazza cautioned against oversimplifying the fund selection process. One of the most persistent misconceptions, she said, is treating all low-cost ETFs as interchangeable.

"While expense ratios are important, they are only one part of the evaluation process. Advisors should also consider factors such as index construction and methodology, fund size, liquidity, trading spreads, tracking efficiency, and issuer stability."

In fixed income especially, she said, indexed ETFs offer a level of precision that goes well beyond basic cost savings.

"ETFs can be used to adjust duration, yield exposure, and overall portfolio risk with a significant degree of precision. Of course, the headline fee matters, but understanding the total cost of investing beyond just the expense ratio, as well as how an ETF functions within a broader portfolio, is equally important," she said.

Active and passive: complements, not competitors

Despite the industry buzz around active strategies, Bonds Mazza said the most effective advisors are building portfolios that use both passive and active ETFs with intentionality rather than ideology.

"Investors increasingly view low-cost passive ETFs and active ETFs as complementary tools rather than competing approaches," she said. "For many advisors, low-cost passive ETFs continue to serve as the core of a portfolio by providing efficient market exposure. Active ETFs can then be used to pursue specific outcomes – whether that's generating income, managing risk, navigating areas of the market that may be less efficient, or expressing a particular investment view."

Periods of volatility, she added, have only reinforced the case for having a disciplined core allocation.

"We aren't seeing advisors move away from low-cost core allocations. If anything, periods of market uncertainty tend to reinforce the value of having a diversified core portfolio," she said.

She pointed to the State Street Bridgewater All Weather ETF (ALLW) as an example of how advisors are thinking differently about diversification, noting the fund has attracted nearly $1 billion in inflows year-to-date.

"Many advisors are going beyond the traditional 60/40 portfolio to balance risks across growth and inflation environments."

What's ahead for advisors

The pace of ETF innovation shows no sign of slowing. More than 850 ETFs launched in the US in the first seven months of 2026 alone, and Bonds Mazza said that product proliferation will place a growing burden on advisors to guide clients through an increasingly complex landscape.

"That will create meaningful opportunities for advisors, but it also places a greater emphasis on due diligence and investor education," she said. "As product choice continues to expand, advisors will play an increasingly important role in helping clients understand how these strategies fit within a broader portfolio and whether they align with their long-term objectives."

Her outlook for the industry is optimistic but grounded in fundamentals.

"The opportunity ahead isn't simply more ETF choice," Bonds Mazza said. "It's using that expanding toolkit to thoughtfully build better portfolios for investors."