This article was published in citywireselector.com on 27th October 2016.
Assets in exchange-traded funds (ETFs) are expected to double to $6 trillion by 2020 but new players to the market could struggle to see any of those new flows, according to a survey from research group EY.
In a report from EY’s global ETF survey called ‘Integrated innovation: The key to sustainable growth’, the firm makes the $6 trillion projection off of a decade of growth in the industry, averaging 21.5% per annum.
As of August 2016, it predicts the ETF market had $3.4 trillion in assets under management. As the industry grows, however, it is becoming progressively more difficult for firms to deliver continued expansion.
Lisa Kealy, an ETF expert at EY said: ‘The ETF industry is expanding, with competition intensifying as new providers enter the market. Pressure to invest in technology and compliance is making the ability to achieve scale increasingly difficult.
‘Integrating innovation throughout the business to address these challenges is crucial to ensuring that providers can meet an ever-growing range of customer needs and attract an ever-wider range of investors.’
The report reveals that while product development is of growing importance in this space, the majority (64%) of providers expect new products to become less successful in the future.
EY canvassed more than 70 ETF promoters and providers across US, Europe and Asia Pacific that make up 86% of global ETF assets.
According to the survey, product supply is reaching saturation point and the growth of more complex ETFs is making it more difficult for promoters to test new products.
The rapid growth of ETF assets continues to attract new entrants to the industry with 90% of survey respondents expecting more players to enter the market.
Respondents identified active managers (22%) and asset managers with no current ETF offering (20%) as the type of promoters likely to make the passive move over the next two years. Asia Pacific stood out as an area where ETFs are expected to grow.
Julie Kerr, EY Asia-Pacific ETF Leader, says: ‘Market entrants — whether established ETF issuers or industry newcomers — need to overcome a lack of scale, distribution and branding in any new market. We’re seeing providers pursue innovative options to confront these challenges, from collaborating, sub-advising or using existing ETF platforms.’
The report also revealed that 60% of those surveyed expect to see further consolidation over the next two years.