The growth of the ETF industry continues to defy superlatives. Global ETF assets, which totaled just $417b in 2005, reached $4.4t by the end of September 2017 – a cumulative average growth rate (CAGR) of around 21%.
It seems that almost 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 factors, we expect the ETF industry to continue its rapid global expansion, outgrowing the wider asset management industry. The prevailing conditions remain favorable, and the industry retains its many innovative characteristics.
Our survey respondents predict ETF asset growth of around 15% per annum for the next three to five years (see Figure 1). If anything, we think this understates the industry’s growth potential. We believe global ETF assets could reach $7.6t by the end of 2020 – equivalent to a CAGR of approximately 18% (13%-14% of which will come from net new inflows) – underpinned by the shift to passive, the size of ETFs relative to the overall market and ETFs’ suitability for digital distribution (see Figure 2).
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We believe global ETF assets could reach $7.6t by the end of 2020, underpinned 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 pre-ordained. 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.
In fact, 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.
“As more companies enter the space, investors will be looking for ETF providers who stand out in their ability to understand investor needs and offer low-cost products.”– Lisa Kealy, EY EMEIA Wealth & Asset Management ETF Leader
We believe that individual firms, and the industry as a whole, need to reshape around investors. In particular, we see a need for providers to:
- Innovate around investors’ needs
- Refine journeys for new and existing investors
- Reduce investor costs and enhance transparency
- Respond to evolving regulation in a way that helps investors
In the four main sections of this study, we examine these four areas in greater detail. In our view, each has a vital role to play and all four can interact positively with one another.
In summary, we believe that promoters who reshape 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.
About the research
This study draws on interviews with more than 70 leading ETF providers, market makers and service providers and is supplemented by our own analysis and knowledge. Our respondents, who manage 85% of global ETF assets, were interviewed across the US, Europe and Asia between May and September 2017.