As exchange traded fund (ETF) businesses expect to grow by nearly 18% per year for the next three to five years, Ireland will continue to attract more than it’s fair share of the market, according to the EY Global ETF Survey 2015 ETFs: a positive force for disruption.
Ireland is currently domicile to 50% of all ETFs domiciled in Europe, with Luxembourg being the country’s nearest competitor with 18% of the European ETF Market. According to the survey, this gap is expected to widen, with 57% of ETF providers favouring Ireland as the destination to administer ETFs in Europe, up from 45% in 2014
EY surveyed nearly 80 leading promoters, investors, market makers and service providers across the US, Europe and Asia between July and September 2015. The respondents collectively represent issuers managing more than 85% of global ETF assets.
Despite an unstable economic environment, more than 90% of those surveyed expect the industry to see positive net new business over the next 18 months, with 34% predicting net inflows of more than 20%. Almost all respondents (91%) expect to achieve a cumulative annual growth rate of more than 10% over the next three to five years, and 27% expect annual growth exceeding 25% over the same period.
Lisa Kealy, EY EMEIA ETF Leader, says:
“Irish UCITS are distributed to 70 countries around the world and are becoming the destination of choice for global distribution of ETFs. Alongside the introduction of the ICAV in 2015 they contribute to the increasing tax efficiency of the Irish structure. All of these factors point to Ireland continuing to attract the lion’s share of the ETF market.
“The ETF industry has an ability to turn investment problems into investment opportunities, so seeing this level of confidence in spite of current economic headlines is not surprising. We continue to see great energy and promise for the future. However, as it seeks to deliver growth in the short term, the ETF industry needs to keep its long-term legacy in mind and ensure it does not harm potential growth expansion over the next 5, 10 or 20 years.”
US continues to lead the ETF market, though Europe and Asia see growth
US ETF providers now manage US$1.95b of assets — four times the total for Europe and 18 times that of Asia, excluding Japan — after averaging cumulative annual growth rates of nearly 24% for a decade. ETF assets still equate to less than 12% of the US mutual fund market, though all US respondents expect the industry to gain net new assets in the next 18 months, and half anticipate growth of more than 20%.
ETF assets grew faster in Europe than in the US or Asia during the first eight months of 2015, and survey respondents expect this performance to continue. The majority expect their own firms to expand by at least 10% to 15% each year over the next three to five years.
Asian ETF assets have grown at an average rate of 29.9% over the past decade, though they have followed a more volatile path than in Europe or the US. Respondents expect this growth to continue, with the majority believing their own businesses will grow by 25% to 30% per year over the next three to five years, despite a decline in Asian-wide ETF assets during the first eight months of 2015.
New product spending will increase
Product development is moving faster than at any point in the ETF industry’s history, as 83% of survey respondents expect to increase new product spending in the next 18 months. Enhanced beta is expected to generate more growth, according to 24% of respondents, compared to 16% in 2014. Currency hedged ETFs is another area expected to generate future growth, according to 22% of respondents, compared to only 5% in 2014. Providers also continue to develop new ideas around single emerging market ETFs, infrastructure ETFs and socially responsible ETFs.
Matt Forstenhausler, EY Global ETF Leader, says: “US-based ETF providers continue to lead in innovation and the introduction of product into new markets. The process of issuing, trading, selling and administering ETFs varies significantly between regions and countries. Accordingly, as they look to grow internationally, providers, market makers and service providers find it necessary to adapt their business models to local conditions.”
Tension exists between some promoters and investors around which products will generate growth. While 24% of promoters and investors believe enhanced beta products will generate growth in the future, only 4% of investors (compared to 22% of product promoters) view currency hedged ETFs as more important for future growth. Likewise, 32% of investors (compared to 20% of promoters) view passive equity funds as a more important growth area, as these are responsible for the majority of ETF assets and net inflows.
Julie Kerr, EY Asia-Pacific ETF Leader, says: “Investor demands are shaping the majority of ETF innovation. But some investors believe promoters may still place too much emphasis on higher margin products. Product innovation is a long-term driver of growth and profitability, but the industry should ensure that they listen to investor needs to continue to deliver value.”
More promoters expected to enter the market
Eighty-nine percent of respondents believe more ETF promoters will enter the market in the next two years. Many believe those new entrants will come from US-based providers (28%); Asia-based providers (19%); asset managers with no current ETF offering (18%); niche players and startups (10%); and European-based providers (10%). Asset managers with no history of issuing ETFs are seen as increasingly likely entrants in markets such as the US, Australia and Southeast Asia.
US providers are widely expected to use M&A to expand overseas, especially in Europe. Globally, however, only 8% of ETF providers are pursuing growth by M&A. Forty-eight percent are not interested in M&A, while 25% are interested in M&A ideas as an acquirer, and 10% are open to M&A ideas as a target.
Pricing and profitability concerns remain
The outlook for management fees is more stable than in recent years, though concerns around pricing and profitability remain. Seventy-three percent believe management fees will remain relatively unchanged, a significant increase from 36% in 2014. Eleven percent expect a decrease of at least 2 basis points (compared to 42% in 2014), and 16% predict a decrease of more than 5 basis points (16% in 2014).
Kealy concludes: “Many providers see the expansion of their investment capabilities instead of the reduction of costs as the best way to relieve margin pressure. This trend shows a highly significant industry-wide shift from a vision of growth focused on price competition and low costs to one driven by a more diversified and innovative product range.”