Four ways ETF providers must reshape their strategies for investors

Our survey details why the industry must create new products and experiences with the changing needs of global investors in mind.

The growth of the exchange-traded fund (ETF) industry continues to astound. Global ETF assets, which totaled just US$417b in 2005, reached US$4.4t by the end of September 2017 — a cumulative average growth rate (CAGR) of around 21%.

Nearly every trend that has shaped investment markets in recent years has worked in favor of ETFs. This includes global themes such as the shift to self-directed retirement saving; economic factors such as low yields; regulatory efforts around suitability and value for money; technological developments such as digital distribution; and investment themes such as the “shift to passive.”

Supported by these trends, we expect the ETF industry to continue its rapid global expansion, outgrowing the wider asset management industry. Prevailing conditions remain favorable, and the industry retains many innovative characteristics.

Our survey respondents predict ETF asset growth of around 15% per annum for the next three to five years. If anything, we think this understates the industry’s growth potential. We believe global ETF assets could reach US$7.6t by the end of 2020 — equivalent to a CAGR of approximately 18% (13% to 14% of which will come from net new inflows) — driven by the shift to passive, the size of ETFs relative to the overall market and the suitability of ETFs for digital distribution.

However, it would be foolish to think that the success of ETFs is preordained. Our predictions could easily be threatened by external crises or by failings within the industry. Individual providers also face growing competition from inside and outside the sector.

To that point, as the industry grows in size and influence, it faces far more complex challenges than in its early days. It is no longer sufficient for an ETF to be cheaper, more liquid or more innovative than a competing mutual fund. If the ETF industry is to fulfill its undoubted long-term potential, every ETF provider needs to stand out in its ability to meet the needs of investors.

We believe that individual firms, and the industry as a whole, need to focus even more closely on investors. In particular, we see a need for providers to:

• Innovate around investor needs
• Refine journeys for new and existing investors
• Reduce investor costs and enhance transparency
• Respond to evolving regulation in a way that helps investors

Each of these areas will play a vital role, and all four can interact in harmony.

Promoters who reshape their offerings around investors will find it easier to protect themselves against the growing strategic pressures facing ETF providers of all sizes. They will also be more likely to emerge as long-term winners in the ETF space. Firms should act now to maximize the potential opportunities — and avoid unnecessary risks.