New entrants forecast to spur ETF market growth

New entrants forecast to spur ETF market growth

Market participants expect the exchange traded fund (ETF) market to grow markedly in the next three years, with most asset management companies expected to have an ETF offering within five years, according to a survey conducted by consultancy firm EY.

This study, which draws on interviews with more than 70 ETF providers, market makers and service providers and is supplemented by EY's own analysis and knowledge, covers firms which manage 85 per cent of global ETF assets, across the US, Europe and Asia.

It suggested 67 per cent of those questioned believe the ETF market will grow to the point where most firms will have an ETF product offering in the near future.

"We believe global ETF assets could reach $7.6trn (£5.7trn) 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," the report stated.

An ETF is a marketable security that tracks an index, a commodity, bonds, or a basket of assets like an index fund. Unlike mutual funds, an ETF trades like a common stock on a stock exchange, and experiences price changes throughout the day as they are bought and sold.

Significantly cheaper than traditional fund management, ETFs are an incredibly fast-growing part of the investment market. Global ETF assets have risen from $800bn (£607bn) 10 years ago to $4.2tn (£3.2tn) at the end of August, according to industry data provider ETFGI.

Last week Legal and General Investment Management (LGIM) plunged into the European exchange traded fund market with the acquisition of ETF Securities' fund platform.

The acquisition of Canvass brings $2.7bn (£2bn) of assets under management to LGIM.

Canvass manages investments for a number of ETFs on the platform, and effectively offers a white label service to other firms wishing to launch their own exchange traded fund service.

In total, it has a range of 17 products, across equity, fixed income and commodities. 

However in the research accompanying the survey, EY found new launch ETF products attracted only 2.9 per cent of the capital deployed to the asset class, indicating that new launches are struggling to gain traction.

The survey found that firms wishing to launch new products will need to focus on offering access to alternative assets, thematic investments and areas such as debt, in order to be able to grow.

Most respondents to the survey, carried out between May and September 2017, said they believe ETF charges will continue to fall in the years to come, as the market grows and new providers launch products.

Matt Forstenhausler, EY Global and Americas Wealth & Asset Management ETF Leader, said: “The industry needs to address market and regulatory threats and be willing to respond by developing new products and modifying existing products.

"A combination of local understanding and global insights can help investors understand the overall business environment and how this will impact investor journeys.”