Moves in the equity market are more than anything driven by supply and demand, with prices rising when there is more demand than supply. With major U.S. indexes at records and valuations looking elevated, demand prospects for 2018 look mixed at best.

An exception to that, however, is exchange-traded funds, which are expected to accelerate their massive popularity in the coming year, according to Goldman Sachs.

The investment bank estimated that U.S. flows into ETFs would hit $400 billion over 2018, which would represent a 33% jump from its 2017 estimate of $300 billion. Such a target would mean the U.S. ETF market grows by about 13% next year, excluding price changes in the underlying assets.

ETFs trade like stocks but hold baskets of securities, like mutual funds. They have seen a surge in popularity in recent years as they are typically seen as cheaper and more tax efficient than equivalent mutual funds, as well as more flexible given the ability to trade them throughout the session. (Mutual funds only price and transact at the end of the day.)

In 2016, ETFs accounted for 30% of all U.S. trading in terms of value, and 23% in terms of share volume, according to Credit Suisse data. Of the 15 most popular securities traded, measured by both volume and valued traded, 14 were ETFs.

Don’t miss: Why the latest round of rock-bottom ETF fees may be a non-event for investors

They have also seen increased adoption amid the broad investor shift to passive instruments, where a fund mimics an underlying index like the S&P 500












SPX, -0.47%










 by holding the same components the index does, and in the same proportion. Fully one-seventh of ETF assets are in funds that track the S&P, according to FactSet. Investors—including active managers, who attempt to do better than the overall market by individually selecting the holdings of the portfolio—use ETFs to get exposure to essentially any market segment, asset class, region, or sector; additionally, a vast majority of passive funds do better than actively managed ones over time.

“Investor preference for passive over active and strong household balance sheets should support strong ETF inflows next year,” Goldman Sachs wrote.

The popularity of ETFs also reflects a shift away from mutual funds, another trend Goldman expects to persist. The investment bank expects mutual fund redemptions of $125 billion in 2018, building on the expected $100 billion in outflows this year.

“The combination of passive fund popularity and weak active fund returns will continue to hurt mutual fund equity demand in 2018,” the investment bank wrote, noting that it had previously expected 2017 outflows of $50 billion, but changed that forecast “given greater-than-expected net selling in the first half of the year.”

Goldman didn’t distinguish between passive and actively managed mutual funds.

Read: Passive investments are hot, but remain a small slice of the stock market

About $132 billion has gone into ETFs thus far this year, per Goldman’s data. According to data from research firm ETFGI, there is currently $3.075 trillion held in U.S.-listed ETF assets, up from $2.465 trillion at the end of 2016. That increase reflects both inflows and the appreciation of the underlying asset prices. Gains have been sizable and broad throughout 2017; the S&P 500 is up nearly 15% thus far this year, while the Russell 2000












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 is up 10.6% and a popular ETF tracking an index of emerging markets












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 is up more than 31%. Bonds












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 are up slightly, while gold prices












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 are up more than 10%.

“ETF assets as a share of the total corporate equity market (public and private) have doubled since 2009 and now stand at a record high (6% of total),” Goldman wrote. “ETF assets under management, including index objective funds, is equal to 14% of S&P 500 market cap and 9% of the total US public equity market.”

Courtesy Goldman Sachs


See more: Passive investing is changing the stock market in ways investors don’t realize

Beyond the expected ETF buying and mutual fund selling, Goldman anticipates a mixed bag for demand when considering other major ownership sources. It expects corporations to buy $590 billion worth of U.S. equities in 2018, mostly through stock buybacks. That would represent growth of 3% from what it expects companies to do over 2017.

“Extended valuation should limit substantial buyback growth,” it wrote. “Rising interest rates and the underperformance of stocks focused on buybacks could pose additional headwinds to total corporate equity purchases.”

More detail: S&P 500 buybacks have dropped by 25% since the first quarter of 2016

Pension funds—which, along with government retirement funds, comprise 13% of the $42 trillion corporate equity market—are expected to sell $250 billion of stock next year, compared with $300 billion in 2017. This will come as the yield on the U.S. 10-year Treasury












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 rises to 3.3%, Goldman wrote. (It is currently 2.45%.)

Goldman expects foreign investors to buy $100 billion next year, down from $150 billion in 2017. Meanwhile, U.S. investors will buy $250 billion of overseas stocks next year, compared with $300 billion this year.

For overseas investors buying U.S. stocks, “Demand should remain positive in 2018 given stable US GDP growth of around 2%,” Goldman wrote. “However, a flat trajectory for the U.S. dollar suggests lower purchases in 2018 compared with this year.”

The U.S. dollar index












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 is down 8.3% in 2017 to date.



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