Global ETF assets have grown to $4.4 trillion as of the end of September, from $417 billion in 2005, and are expected to hit $7.6 trillion by 2020, according to a new report from Ernst & Young Global.
The ETF market will be transformed by both current and new investors, said the report, research suggests that 15% to 25% of ETF inflows, or approximately $250 billion, will come from new investors over the next three years, the report said, adding that institutional investors are expected to continue to dominate ETF investing during that timeframe.
The research drew on interviews with 70 leading ETF promoters, market makers, and service providers who manage 85% of global ETF assets, according to Ernst & Young. The respondents predicted that ETF assets will grow approximately 15% per annum for the next three to five years.
“If anything, we think this understates the industry’s growth potential,” said the report, which predicts ETF assets will grow 18% per year, 13% and 14% of which will come from net new inflows.
The report also said that passive assets under management could exceed active assets under management by 2027.
“We see an increasing consensus that both active and passive strategies can create value within most portfolios,” said the report. “In the US, the shift to passive has now been at work for 10 years. ETFs should continue to benefit disproportionately, thanks partly to low fees and partly to market volatility, which often increases the appeal of ETFs’ intraday liquidity.”
For example, the report said the highest volume of ETF trading in the UK occurred immediately after the Brexit vote, and the 2016 US presidential election.
The report also found that while two-thirds of respondents believe most managers will have an ETF offering in the next five years, ETF providers will face new challenges as the industry grows in size and influence.
“ETFs can no longer just be cheaper or more liquid than actively managed mutual funds,” said Lisa Kealy, Europe, the Middle East and Africa Wealth & Asset Management ETF Leader, in a release. “The industry will need to innovate around investors, refine investor journeys, and reduce investor costs to remain competitive.”
One of Ernst & Young’s suggestions was that Asian promoters should develop more Asian ETFs for Asian investors.
“Asian institutions outside Japan and Australia often prefer US or European ETFs to their less-liquid Asian counterparts,” said the report. “But we believe Asian promoters could benefit from more local or regionally themed products. Chinese firms manage over $7.5 trillion, including $1.3 trillion of mutual funds. ETFs currently represent 3% of that total.”
The company also said fixed-income ETFs will remain the industry’s greatest area of focus over the next few years, but will never exceed equity. Still, it expects global fixed-income ETF assets to reach $1.6 trillion by 2020, compared with $600 billion at the end of 2016. It also expects global smart beta ETF assets to reach $1.2 trillion by 2020, compared with $600 billion at the end of 2016.
The report also said pension funds are expected to use ETFs for liquidity management, while wealth managers are expected to look for core exposure through model portfolios. Certain hedge funds will use leveraged and inverse ETFs to execute high-conviction long or short positions.
“The ETF industry needs to do more to help refine investor journeys for institutions by understanding and anticipating the long-term needs of different investment groups, addressing their concerns and developing the expertise needed to meet their unique challenges,” said Julie Kerr, EY Asia-Pacific Wealth & Asset Management ETF Leader.