This article was originally published in Barron’s on October 25th 2016.
ETF assets are regularly reaching new highs and a record number of new funds are coming to market, so it’s not surprising that industry watchers expect ETFs to keep growing. But they may increasing faster than you think.
A new study by EY finds that ETFs’ assets under management are on track to double to almost $6 trillion by 2020.
Over the past decade, ETFs have seen growth of 21.5% per annum, and assets reached $3.4 trillion in August, so it’s easy to see how rapid growth could get the market to that high water mark. Yet EY warns that while their popularity should continue, it’s getting more and more difficult for ETFs to deliver continued expansion.
Although launches are happening regularly, nearly two-thirds of providers expect new products to be less successful going forward, given that supply is reaching a saturation point, and more complex products mean it’s more difficult to test new products.
More detail from EY:
The rapid growth of ETF assets continues to attract new entrants to the industry. Ninety percent of survey respondents expect more new players to enter the market and, in the US, the figure is 100%. Respondents identified active managers (22%) and asset managers with no current ETF offering (20%) as the type of promoters likely to enter the market in the next two years. Geographically, Asia-Pacific remains the most popular target, particularly among US respondents, but also for European and Asia-Pacific promoters with 41% of respondents planning expansion in this market…
The ETF industry lags behind when it comes to innovative distribution models. Only 10% of survey respondents believe their distribution model is suitable for today and the future, compared to 20% who view it as outright insufficient. The emergence of robo-advisors ¾ an online wealth management service that provides automated, algorithm-based portfolio management advice without the use of human financial planners ¾ as a scalable retail channel could change this picture. Eighty-eight percent of respondents expect robo-advisors to accelerate ETF growth. And nearly half (45%) think robo-advisors will deliver in excess of 10% of annual inflows within three to five years. The report suggests promoters will need patience to realize long-term benefits, however.