Respondents to EY’s latest survey of the global exchange-traded funds and products sector are highly optimistic about their prospects for growth.
Interviewees said they expected their businesses to grow by 18% every year for the next three to five years.
EY interviewed some 80 promoters, investors, market makers and service providers across the U.S., Europe and Asia/Pacific between July and September. Respondents included issuers managing 86% of global ETF assets.
According to the survey, the ETF/ETP industry managed 5,978 products, representing total assets of $2.8 trillion at the end of September.
At present, EY said, the U.S. industry managed $1.9 trillion of assets, or four times that of Europe and 18 times that of Asia/Pacific, excluding Japan.
Half of U.S. respondents expected 20% asset growth in the next 18 months.
The report highlighted several trends in the U.S. sector.
For one, the ETF investor base is broadening. Endowments and charitable foundations are joining corporate and public sector pension schemes, hedge funds and insurers as allocators to the sector.
Innovation has put the U.S. market at “the cutting edge of ETF product development,” according to the report. Innovation is driven by niche providers with specific sector, structural or asset expertise and by big providers seeking to offer their institutional clients a comprehensive range of products.
And the U.S. is leading the global rush to digital distribution in asset management. EY said this may be the “hottest” trend in the ETF space with the potential crossover between online or automated advice and the use of ETFs to create model portfolios.
The EY report said the U.S. industry continued to be the paradigm to which other regions aspire, and Europe and Asia/Pacific appeared unlikely to match its size and efficiency.
This means flexibility in adapting to local conditions will be key to growth in other regions.
Growth and Innovation
EY noted that the industry’s increasing size had drawbacks, the biggest one being more external attention. Respondents, though generally welcoming closer scrutiny, worried about regulatory misunderstandings and associated potential for reputational risks.
At the same time, size brings greater influence, EY said. Many active managers, feeling pressured to respond to developments such as smart beta, are launching ETFs or partnering with existing providers. “There could be no clearer sign of the growing impact that the ETF industry is having on the wider regulated funds sector and the asset management industry as a whole,” according to Lisa Kealy, EMEIA Wealth & Asset Management ETF leader at EY.
Among the factors contributing to growth are the influx of institutional money into the sector. Ninety-two percent of investors polled said they expected to increase their allocations to ETFs in the coming year.
Many respondents also expected retail investors to be the industry’s chief long-term driver of growth. Over the next three to five years, they predicted retail growth of 5% to 15%.
The report said innovations appeared to be moving faster than at any time in the industry’s history. Eighty-three percent of respondents said they would increase spending on new products over the next year and a half.
According to the report, ETF providers see innovation as necessary to building profile, generating inflows and defending profit managers, and greying populations and the shifting investments aims of insurers and pension funds are demanding robust products.
Kealy cautioned that innovation and creativity bring controversy and some risks. She also pointed out that ETFs depend on a robust ecosystem and close cooperation among providers, authorized participants, market makers and service providers.
“In its rush to deliver growth over the next two to three years, [the industry] needs to ensure that it does nothing to harm its potential expansion over the next five, 10 or 20 years.”
The ETF industry “needs to ensure that it continues to act as a positive force for disruption,” she said.
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