Those who still require evidence of the market presence established by exchange-traded funds (ETFs) need look no further than the financial accounts of BlackRock, the world’s biggest asset manager.
In the first quarter of this year, $64.5bn (£50bn) of the fund giant’s net inflows came from its iShares ETFs, representing a record amount for the provider. BlackRock’s active products, in contrast, suffered $1.8bn of net outflows.
A slow and steady rise in ETF demand – as witnessed over recent years – has now started to accelerate sharply. According to research provider Cerulli, US-based ETFs alone saw their assets under management (AUM) rise by 10 per cent in the opening quarter of 2017 to nearly $2.8trn.
Chart 1 shows the net sales for the European ETF market over the past 10 years. This growth is also starting to broaden out: notably, in 2016, net sales of bond products overtook those for equity ETFs.
The UK adviser space has not been immune to this trend. An acknowledgement of ETF popularity among intermediaries and end-investors is shown by platforms’ decisions to make more of the products available to their users.
Meanwhile, industry players have attempted to make the products more accessible to investors with smaller pots of money by increasing the use of fractional ETF shares – a process that ensures the likes of model portfolios can use the products effectively.
At the same time, industry initiatives such as the ETF Forum mark a desire to engage more with the intermediary community. However, it may take more than this to entirely win over the adviser market, as concerns still endure about complexities in the space.
As with traditional index tracker funds, ETFs have enjoyed robust demand in part because of an alluring proposition: exposure to a benchmark, such as the S&P 500 or FTSE 100, at a price much lower than that charged by many actively managed portfolios.
Costs have come under increased scrutiny from the likes of clients and regulators, as evidenced by the FCA’s asset management market study, the final report for which was published in June. As the focus on fund fees has intensified, so has interest in ETFs as well as passives more generally.
ETFs offer specific advantages. Unlike trackers they are, as the name suggests, traded on exchanges. This means they can be bought throughout the day, providing a quick, simple means to execute tactical asset allocation plays for those who tend to favour flexibility, such as discretionary fund managers.
This also leads to a greater onus on price, creating additional opportunities to buy exposure cheaply at the right moment or take profits when valuations move higher.
“Investing in ETFs is just that – exchange-traded. They are priced all the time the market is open, whereas investing in an index tracker fund is just once a day. This can cause price differentials throughout the day,” explains Richard Philbin, chief investment officer at Wellian Investment Solutions.