ETF Outlook 2026: Navigating the Next Wave of Growth

What You Need to Know:

• The ETF market is expected to expand in 2026, with growth fueled by increased interest in active management, more option-based strategies in the U.S. and asset allocation ETFs in Canada.
• SEC approval for ETF share classes may further boost U.S. active ETFs.
• While fixed income ETFs lag in asset growth, popularity may grow if the equity market goes sideways.
• Equity ETFs, especially those using options and asset allocation ETFs, are expanding quickly
• Innovation continues with products like autocallable ETFs, tokenization and efforts to access private markets.

The ETF market is projected to continue growing in 2026 driven in Canada by asset allocation ETFs, in the U.S. by an increase in option-based strategies, and by overall rising interest in active ETFs. SEC approval for ETF share classes may further boost U.S. active ETFs. Although fixed income ETFs have lagged in terms of asset growth, they could become more popular if equity markets level off. Equity ETFs — particularly those that use options — and asset allocation ETFs are seeing rapid expansion while new developments like autocallable ETFs, tokenization and access to private markets continue to bring innovation to the industry.

ETF Share Classes – A Key Driver of Growth

Canada was an early adopter of the ETF share class, locally called the ETF Series. By the end of 2025, there were 274 ETF share classes of mutual funds in Canada with total assets under management (AUM) reaching CAN$41.4 billion and full-year inflows amounting to CAN$12.6 billion. In 2025, several large asset managers introduced ETF series of their mutual funds for the first time. Looking ahead, it is anticipated that additional issuers will launch ETF series based on their established mutual fund strategies.

Although the ETF series of an existing mutual fund has thrived in many markets globally, including Canada, it is not widely available in the U.S. due to a patent expired in 2023. Since the expiry of the patent, U.S. ETF issuers have been applying for ETF share classes to their mutual funds. In November 2025, the SEC approved an application for ETF share classes, granting a green light in the U.S. for the dual class structure for active funds. In December 2025, the SEC issued approval for several issuers, including many large names. ETF share classes are expected to launch in the U.S. early this year. Based on the Canadian experience, the ETF share class may help U.S. ETFs bring in US$75 billion inflows per year. Over time, these ETF share classes have the potential to gather US$1.5 trillion in assets. More details can be found in The Future of U.S. ETF Share Classes and Launching an ETF Share Class - Easier Said than Done on the TD One Portal.

The dual class share structure in the U.S. has been largely used to defer capital gains and created significant advantages for one asset manager. However, that firm only uses this structure for passive funds, while other asset managers are now approved to apply it to active funds. Active funds typically generate more capital gains as they rebalance portfolio constituents more often. As a result, the SEC's approval of ETF share classes to active mutual funds is likely to create greater impact when applied to passive funds.

Active ETFs – the Growth Engine of ETFs in the Future

We recently published a detailed report on active ETFs and their growth in the U.S. and Canada. Although passive ETFs still account for half of the inflows in Canada and 68% of total inflows in the U.S., the growth of active ETFs has been much faster as of late. In 2026, with more active ETFs coming to the market thanks to the approval of ETF share classes in the U.S., active ETFs are expected to play a bigger role in ETF inflows and product launches.

Fixed Income – Modest Growth, Greater Potential

In 2025, all asset classes saw record inflows, but fixed income ETF assets grew slower than equity and asset allocation ETFs. Equities and asset allocation ETFs performed exceptionally well over the last two years, which helped boost their assets significantly. Meanwhile, weaker performance and slower growth have led to a smaller market share for fixed income ETFs. By the end of 2025, fixed income made up 25.6% of the Canadian ETF market and 16.9% of the U.S. ETF market—a decrease from 28.2% and 17.3%, respectively, in 2024.

Although fixed income ETFs experienced a decline in market share, their inflows remained strong. In Canada, fixed income ETF inflows increased by 51% in 2025 compared to the prior year; slightly below the overall ETF inflow growth rate of 62%. By contrast, in the United States, fixed income ETF inflows grew 43% year-over-year in 2025, exceeding the total ETF inflow growth rate of 35%. Fixed income ETFs may regain prominence in 2026 if equity markets remain flat, as their role as an equity hedge becomes increasingly valuable in periods of uncertainty and volatility. Within the fixed income ETF segment, corporate bonds present a notable growth opportunity by providing higher yields than government bonds while maintaining lower risk profiles compared to high yield bonds. With anticipated interest rate cuts and rising global uncertainty, many ETF investors are opting for investment grade credit that offers attractive yields with a balanced level of risk.

Equities – Option Strategies Stand Out

Equities played a key role in driving ETF market growth in 2025. Equity ETFs are recognized for their efficiency in providing broad market or large-cap exposure. Due to increased headline risks, investors have turned to equity ETFs as affordable, effective tools for implementing more sophisticated investment strategies. Option strategies have broadened the use of equity ETFs, and their appeal among investors is set to grow.

Covered Call ETFs in Canada

In Canada, option strategies are especially prominent through covered call ETFs. In 2025, these funds attracted total inflows of CAN$9.8 billion. Their appeal stems from declining interest rates, which have made it difficult for fixed income ETFs to yield 5%; a return many investors have grown used to. Covered call ETFs, less affected by rate changes and offering attractive yields, have become popular alternatives for those seeking income. If rates remain unchanged until 2027, the strong demand for covered call ETFs will likely persist into 2026. Furthermore, if stock market volatility increases, covered call ETFs may offer lower volatility and potentially better returns when markets decline. Single-stock covered call ETFs also gained momentum in 2025, serving as replacements for individual stock holdings while generating additional yield. Should markets move sideways, these ETFs could become even more popular, as they tend to outperform during downturns.

Option Strategy ETFs in the U.S.

Option strategy ETFs have become one of the fastest-growing segments in the U.S. ETF market. In 2025, equity ETFs using option strategies attracted a record US$65 billion in total inflows. Covered call ETFs led with US$40.6 billion, followed by equity buffer ETFs at US$14.4 billion. Looking ahead to 2026, both covered call and buffer ETFs are expected to benefit from rising market volatility and headline risk. Notably, a large U.S. asset manager announced an acquisition that reflects a growing emphasis on defined outcome ETFs and their potential future prominence in the ETF industry.

International ETFs

Although the majority of ETF assets in Canada and the U.S. remain concentrated on North American securities, international ETFs are experiencing increased interest. For individual investors, gaining direct exposure to global markets presents significant challenges. However, ETFs provide an efficient mechanism for diversifying investments across various regions. With U.S. markets consistently reaching record levels, some investors regard international equities as a potential source of value. Furthermore, international ETFs can enhance portfolio diversification, particularly within the context of today's increasingly deglobalized economic environment.

Asset Allocation – Canada's Super Star

Asset allocation ETFs have experienced significant growth in Canada. Asset allocation ETFs attracted CAN$22.7 billion in inflows, twice the amount accumulated in 2024. Total AUM reached CAN$66 billion, reflecting a 78% year-over-year increase. Many Canadian ETF providers regard asset allocation ETFs as a strong opportunity for future expansion, driven by rising adoption among retail investors.

The Canadian asset allocation ETF market remains highly concentrated, with the top three issuers in the space collectively accounting for 92% of all assets and contributing 90% of total inflows in 2025. At present, twelve issuers in Canada offer comprehensive suites of asset allocation ETFs. To achieve differentiation in this competitive landscape, providers may need to employ innovative strategies to distinguish their offerings.

In contrast, the U.S. asset allocation ETF segment is comparatively limited in scale. While these products represent 9.3% of total ETF AUM in Canada, in the U.S., they comprise only 0.3%. However, as more self-directed investors participate in the ETF market, U.S. issuers may also capitalize on growing demand for simplified, one-ticket investment solutions.

New ETF Product Innovations

Autocallable ETFs

Autocallable ETFs achieved significant traction in the U.S. since their introduction in June 2025, accumulating US$590 million in assets. Further growth is anticipated for autocallable ETFs in the U.S. and globally.

ETF Tokenization and Crypto

Tokenization has continued to generate significant interest within the financial industry throughout 2025, and this momentum is expected to carry into 2026 as more major institutions become involved. Our previous article on ETF tokenization covered many important milestones in this area. This year, we've already seen ETFs launch in the U.S. focused on tokenization. Additionally, crypto ETFs gained widespread popularity in the U.S. since their inception, and the SEC's increasingly supportive stance towards these investment vehicles has further propelled their growth.

Private Asset ETFs

While the growth of private asset ETFs has not fully met industry expectations, the potential remains considerable. According to a PwC private market report, total AUM for private markets is projected to increase from US$139 trillion in 2024 to US$200 trillion by 2030, representing a compound annual growth rate (CAGR) of 6.2%. The substantial market size and robust growth rate have encouraged ETF issuers to actively pursue investment opportunities within private markets. In 2025, a large U.S. ETF issuer introduced the first private credit ETF, which achieved US$100 million in assets in less than twelve months. Additionally, a new ETF launched aiming to replicate private equity returns through a diversified portfolio of public equities. This approach seeks to balance the return profile of private assets with the liquidity advantages of public securities, presenting a model that may gain wider adoption among ETF issuers in 2026.