Data and technology will be key to enhanced distribution and controlling costs, according to latest EY survey
A strong majority (92%) of the respondents interviewed as part of the EY 2018 ETF Research feel more promoters will enter the market over the next two years. More than 60% (65%) believe asset management arms of large banks and/or active managers will enter the market. Slightly more than half (51%) indicate small niche players and/or new startups will come to the sector.
Double-digit growth to continue, new challenges emerge
The ETF industry is confident that the double-digit growth will continue. More than half (56%) expect the growth rate of the European ETF industry to be between 11% and 20% over the next 3 to 5 years. Nearly a quarter (22%) of respondents expect a growth rate of more than 20% compared with just 10% of respondents in 2017. More than half (57%) of asset managers indicate the success ratio of new launches will improve in the future. This is up from 36% in 2016 and 45% in 2017.
Bernard Lhoest, Partner, Banking and Capital Markets Leader, EY Luxembourg, says:
‘’The fundamentals are stacked in favor of the sector. While investors continue to flock to the ETF industry, it’s entered a new phase — one that is marked by continued growth. However, it’s also perceived as the right time to pursue process improvements, product innovations and new markets in an attempt to build differentiated market positions as more and new potential competitors are expected to flood the ETF market.’’
China — the game changer?
The Chinese market represents a substantial market for the sector in Europe — given its size and Asian investors’ demand. Ninety-seven percent of respondents believe the sales opportunities in China for ETFs will be US$100b or more, once ETF Connect (a cross-border project that would give Chinese investors exposure to overseas assets through ETFs listed in Hong Kong) is operational within five years from now, compared with 66% of respondents who believe it will reach US$100b or more within three years.
The ETF market, however, has some key issues to address to be able to fully harness this large opportunity, the report finds. Only about one-third (30%) are currently ready or on track to use ETF Connect once operational. In addition, 68% feel the industry is not doing enough to support the ETF Connect project in terms of addressing operational issues.
Regulations and technology driving change
Regulatory requirements and emerging technologies are the primary drivers to change in their operating model — a view echoed by more than 66% of respondents.
Pierre Kempeneer, Senior Manager, ETF Leader, EY Luxembourg says: “Cost is now seen as a performance metric, so technology and operating model changes are planned to help create a competitive advantage. More than two-thirds (83%) of asset managers have told us they are looking to use new technologies to reduce cost. So there will be significant shift in the operating model.”
Data to power distribution
The industry will continue its focus on improving distribution. The way data is managed will, to a great extent, determine the success of distribution strategies, the report finds. The most popular approach to improving distribution cited by respondents is enhancing the product data on their website (67%), followed by selling through online platforms (62%).
Pierre says: “Given the prevailing uncertainty and pressures on margins, the optimism is proof of the sector’s resilience. The ETF industry, however, will need to recalibrate on many fronts to sustain momentum, translate technology benefits to increased client experience, adapt to regulatory changes and keep up with emerging opportunities. Being complacent will be very dangerous.”