ETFs are on the move. Smart, customer-led product innovation holds the key to sustaining this growth, strengthening the ETF industry and making investing better.
ow can exchange-traded fund (ETF) providers innovate their way to sustainable growth? That’s the question facing the ETF industry as it looks back on the blur of recent growth and races toward the 2020s. ETFs have grown at an astonishing pace over the past decade. They accounted for no less than US$5.7t of assets at the end of August 2019, with European ETFs making up US$890b of the total. Despite market volatility, year-to-date compound annual growth rates are running at 16% in Europe and 17% worldwide. This exceptional growth not only reflects the global shift to passive investing — a trend ETFs helped to create — but also ETFs’ tradability and flexibility.
Even so, the ETF industry can’t afford to ignore the global economic situation. Growth is slowing in key markets, such as China and Germany, as geopolitical uncertainty throws a shadow over financial markets. August 2019 was the first month in years to see net global outflows from ETFs. Despite their strong track record, ETF providers can’t assume that what has worked well to date will guarantee future success.
This means that ETF product innovation, always central to the industry’s story, is more important than ever for growth. In an increasingly crowded market, innovation also allows new entrants and second-tier firms to compete with the industry’s leaders. In this paper, we look at two key ETF growth markets and suggest actions firms must take if innovation is to deliver sustainable benefits for investors — and for themselves.