The funds’ share of market capital will rise from 17 per cent today to 24 per cent by 2027, according to a report from Oliver Wyman.
The ETF market has grown at 16 per cent per annum between 2016 and 2022, compared with the growth in all funds’ assets under management which rose per cent over the same period.
Adoption is particularly high in the US, the report said, as investors benefit from tax advantages, and the resulting increase in visibility and the accessibility of ETFs has driven the popularity of ETFs in Europe.
In the US, the number of ETF launches has exceeded the number of mutual fund launches, and in Europe 13 per cent of all fund launches were in 2022, up from 5 per cent in 2016.
Indeed, ETFs made up five of the most popular investments in 2022 among AJ Bell’s DIY investors.
ETFs are normally thought of as passive funds, however the report notes that active ETFs are gaining traction among investors.
“Not only are investors looking for differentiated strategies to beat the market, but they are also increasingly looking for products that meet their needs for environmental and socially responsible investing, as well as allow them to connect with contemporary themes.
We expect a continued pivoting of the ETF marketOliver Wyman
“This is driving significant growth in a theme-based and innovation-focused part of the ETF market,” the report said.
Between 2016 and 2022, the number of active ETF launches rose 30 per cent in the US and 92 per cent in Europe.
Passive fund house Vanguard expanded its ETF range last summer, launching two new funds focussing on the FTSE Developed Europe and North America All Cap indices, using an exclusionary strategy to focus on reducing exposure to certain industries.
The ETFs are called “ESG-focussed” as a result.
Smaller fund providers are capitalising on the popularity of innovative ETFs, however there are a number of challenges faced, including the high cost of infrastructure, the high risk of failure, and difficulties hiring people with an appropriate amount of expertise in the area.
“These challenges have given rise to a new trend in the ETF market — the emergence of white-label ETF providers,” the report said.
White-label ETF providers allow fund providers with functions such as portfolio management, custody, fund administration, as well as marketing and distribution.
This creates economies of scale, and reduces the financial risk and operational challenges for smaller providers, the report said.
Retail investors are becoming increasingly “cost sensitive” when looking at investment vehicles, benefitting the ETF market which typically has lower costs.
Based on these trends, Oliver Wyman expects the ETF market to grow between 13-18 percent per annum over the next five years, drien by both the strong inflows and the structural shift from mutual funds to ETFs.
“Going forward, we expect a continued pivoting of the ETF market, particularly in the innovation-focused segments of active and thematic ETFs,” the report said.
“This will result in an increasing share gain of white-label ETF providers to serve this segment.”
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