EY - ETFs on track for spectacular global growth

ETFs on track for spectacular global growth

Key findings #1-5

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The remarkable success of exchange-traded funds (ETFs) shows no signs of slowing. We expect annual growth rates of 15%-30% globally in the next five years. At this pace, the ETF industry could surpass the hedge fund industry in assets under management during the next 12-18 months.

The success should not be taken for granted. If the industry is to fulfill its potential for long-term growth, the right building blocks must be in place. These include better educated customers, better informed regulators, effective distribution and robust pre- and post-trade infrastructures.

We highlight below 10 key findings from our Global ETF Survey. For more details, download the full report.

1. ETFs continue to grow rapidly, but few markets will follow the US model.

ETFs are outgrowing the wider asset management industry in every region, but each market will follow its own development path.

US ETF assets represent more than 70% of the global total. Growth has slowed, but the market is still expected to expand by more than 15% annually – hardly a sign of full-blown maturity.

In comparison, ETFs in developing markets are in their infancy. Growth rates in Asia Pacific are particularly high, and the market is expected to continue expanding at 20-30% annually.

The European industry is a hybrid. In many ways, it is as sophisticated as the US market. However, it is much more fragmented, and retail adoption is far lower.

2. The industry’s success depends on delivering liquidity in good times and bad.

Liquidity is the most distinctive and important feature of the industry, particularly for institutional investors. Most respondents view US$50m, or even US$100m, as the minimum viable fund size.

Lack of liquidity is a particular concern for emerging markets. The situation can drive local capital into more liquid US or European-listed ETFs.

Promoters tend to see size and bid-offer spreads as key measures of liquidity, while market makers put more weight on trading volumes, the ability to offer funds as collateral and the liquidity of indices’ underlying constituents.

3. Efficient centralized settlement would be a game-changer in Europe if it can be achieved.

Europe will never be a single market like the US, but promoters and market makers are crying out for better cross-border cooperation. Cross-border settlement in Europe can cost four to six times as much as in the domestic US market.

For now, innovation within the European market may offer the best opportunity for change. Most of our interviewees would support consolidated tape (a continuous feed of ETF price and volume data). However, many are skeptical that the market can achieve the necessary cooperation, given the dominance of OTC trading.

4. Innovation is vital to successful fund launches, but needs to be handled with care.

New products remain central to most promoters’ business models, but there is no longer room for “me too” offerings. Promoters are launching fewer funds, but they expect much higher hit rates.

Fund strategies continue to get more sophisticated. The hottest areas include:

  • Fixed income funds, particularly high-yield products\
  • Active ETFs
  • Smart, enhanced or alternative beta ETFs

5. Attitudes to pricing are becoming more sophisticated as ETF markets develop.

Price competition remains intense, but attitudes toward pricing are changing as the industry matures. Globally, management fees are seen as a slightly less important differentiator than last year, and as only the fourth most important overall.

Investors are beginning to understand than management fees do not always reflect the full cost of ETF investment. Tracking error and tracking difference are increasingly included in investors’ cost assessments.

Click here for five more key findings.