ETF industry expects growth of nearly 18% per year

Wednesday 16 December 2015

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  • 90% of ETF providers globally expect positive net new business in next 18 months
  • 27% expect cumulative annual growth rates of more than 25% over next 3-5 years
  • New product development at all time high

Exchange traded fund (ETF) businesses expect to grow by nearly 18% per year for the next three to five years, according to EY’s 2015 Global ETF Survey. Continuing gains in market share from both traditional active asset managers and passive mutual funds, increasing ETF allocations from institutional investors, and innovative product development were found to be the key drivers for the strong growth outlook across the industry.

The report,  ETFs: a positive force for disruption, is based on an EY survey of nearly 80 leading promoters, investors, market makers and service providers across the US, Europe and Asia. The respondents collectively represent issuers managing more than 85% of total global ETF assets.

Despite an unstable economic environment, more than 90% of those surveyed expect the industry to see positive net new business over the next 18 months, with 34% predicting net inflows of more than 20%. Almost all respondents (91%) expect to achieve a cumulative annual growth rate of more than 10% over the next three to five years, and 27% expect annual growth exceeding 25% over the same period.

EY Oceania Wealth and Asset Management Leader, Antoinette Elias, says, “The ETF industry has an ability to turn investment problems into investment opportunities, so seeing this level of confidence in spite of current economic headlines is not surprising.”

“We continue to see great energy and promise for the future. However, as it seeks to deliver growth in the short term, the ETF industry needs to keep its long-term legacy in mind and ensure it does not harm potential growth expansion over the next 5, 10 or 20 years,” Elias says.

“The US continues to lead ETF market growth – with US ETF providers now managing US$1.905t of assets – but Europe and Asia are also growing. Asian ETF assets have grown at an average rate of 29.9% over the past decade, though they have followed a more volatile path than in Europe or the US. Respondents expect the Asian growth to continue, with the majority believing their own businesses will grow by 25% to 30% per year over the next three to five years, despite a decline in Asian-wide ETF assets during the first eight months of 2015.”

“Closer to home, Australian ETFs are likely to increase in both number and size,” Elias says.

New product spending will increase

Product development is moving faster than at any point in the ETF industry’s history. In fact, 83% of survey respondents expect to increase new product spending in the next 18 months.

Providers are continuing to develop new ideas around single emerging market ETFs, infrastructure ETFs and socially responsible ETFs. But tension exists between some promoters and investors around which products will generate growth. While 24% of promoters and investors believe enhanced beta products will generate growth in the future, only 4% of investors (compared to 22% of product promoters) view currency hedged ETFs as more important for future growth. Likewise, 32% of investors (compared to 20% of promoters) view passive equity funds as a more important growth area, as these are responsible for the majority of ETF assets and net inflows.

“Investor demands are shaping the majority of ETF innovation, but some investors believe promoters may still place too much emphasis on higher margin products,” Elias says.

“Product innovation is a long-term driver of growth and profitability, but the industry should ensure that they listen to investor needs to continue to deliver value.”

More promoters expected to enter the market

Eighty-nine percent of survey respondents believe more ETF promoters will enter the market in the next two years. They expect those new entrants to come from a range of areas including: US-based providers (28%); Asia-based providers (19%); asset managers with no current ETF offering (18%); niche players and startups (10%); and European-based providers (10%).

“Asset managers with no history of issuing ETFs are increasingly being seen as likely entrants in markets such as Australia, Southeast Asia and the US,” Elias says.

“Locally this means we can expect to see an increase in ETF products in Australia as demand for these products continue to grow, especially given their potential suitability for SMSFs,” Elias says.

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About the survey

EY’s third global study of the ETF industry surveyed nearly 80 leading promoters, investors, market makers and service providers across the US, Europe and Asia between July and September 2015. Respondents included issuers managing 86% of global ETF assets.