Global ETF Survey 2015

ETFs: a positive force for disruption

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Our latest global survey of the ETF industry was conducted against a far less stable backdrop than in previous years. So it was striking to find that interviewees remain extremely confident about their prospects for growth. A weighted average of global responses suggests that respondents expect their businesses to grow by around 18% every year for the next three to five years.

The industry’s increasing size is not without its drawbacks. Chief among these is an ever-growing level of external attention. While most respondents welcome closer scrutiny, there are concerns about regulatory misunderstandings and the associated potential for reputational risks. And, while the ETF industry mainly continues to get good press, some interviewees admit to frustration at the way that market volatility is sometimes labeled “an ETF problem.”

On the upside, greater size brings greater influence. Active managers with no history of issuing ETFs are being forced to respond to developments such as smart beta, with many choosing to launch ETFs or partner 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.

Below we highlight key opportunities, challenges and trends.

1. Key opportunities

  • Continued strong growth is the biggest opportunity for all industry participants.
  • Certain regulations suit ETFs over mutual funds, including bans on inducements.
  • Investor trends also benefit ETFs, such as the move towards passive and cost-effective products.

2. Key challenges

  • Regulation can pose a challenge in terms of implementation and compliance, without aiding the industry.
  • Regulators are focusing on the industry, due to huge growth rates.
  • Reputation of ETFs needs to be maintained and strengthened; industry needs to continually educate the investment world so that views are not unfairly biased by negative press.

3. Key trends in 2015

Products

  • Increase in the optimal seed capital amount from $19m to $31m overall. However, the minimum size of a fund has decreased from $80m to $63m.
  • Success rates of new products are improving, and there is an increasing level of new product launches.
  • There is a clear swing in demand from fixed income to equity.

Market participants

  • Exchanges look to consolidation rather than expanding services to grow.
  • More promoters are still expected.

Investors

  • There is an increased importance of brand as the most important differentiator for promoters – from 7% to 28%.
  • Investors are more skeptical of the future of swap-based ETFs – from 80% to 56%.

Operating models

  • There is less expectation of tightening management fees – from 64% to 47%.
  • There is greater focus to reduce direct operational costs.
  • The use of technology is more important than ever – primarily around links to Authorized Participants and client dashboards.
  • Ireland increased in popularity as the key administration location in Europe – from 48% to 56%.