Financial Services Ireland


ETF Research 2020: can ETFs scale new heights in an unfamiliar environment?

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EY’s latest ETF research, which you can download below, shows that ETF promoters’ growth plans are based on product innovation, retail adoption and digital distribution. 

The resilience of ETFs during market stress is not the only factor that argues for continued strong growth into the 2020s. The industry’s historic growth drivers, including the shift to passive and ease of access to different markets, remain in force. Other trends reshaping the investment industry — like the boom in ESG investing, the increasing demand for high standards of transparency, and the need for individuals to take more responsibility for long-term savings — should also favour ETFs. This picture is backed up by our latest ETF research, which shows that ETF participants expect the next five years to continue on that strong growth trajectory.

Our own predictions are slightly less bullish, reflecting the global outlook for asset management — which we expect to feature slowing growth in AUM, revenues and net inflows. Our forecasts, which incorporate the likelihood of further market corrections and a slow W-shaped recovery,  anticipate a CAGR of 10% in AUM for European ETFs over the next five years and expect global ETF assets to reach US$10t by 2025.

So, what will drive the growth of ETF assets over the next five years? Experience suggests that flagship index-tracking funds will capture a large slice of inflows. But wafer-thin margins mean that this is not a sustainable growth of strategy for new entrants. Nor will it help the bulk of ETF providers. That view is confirmed by EY research, which shows that individual ETF promoters expect the key drivers of growth to be launching new products, reaching more investors and improving distribution networks. New entrants are also expected to drive the industry’s expansion. But none of these four growth avenues will be straightforward.

  • Getting ready for the “new normal”

The increasing scale, complexity and reach of ETFs, together with the ways in which Covid-19 is accelerating change in the investment industry, mean that it’s vital for all ETF providers to tailor their growth plans to the post-pandemic world. Delivering the right outcomes, to the right investors, in the right way, will be essential to the industry’s ability to achieve sustainable growth. EY believes the ETF industry must focus on four key areas during the years ahead if it is to reach its ambitious targets for expansion.

  • Navigating the risks and opportunities of regulation

EY research shows that ETF professionals (74%) see regulation as the leading driver of change in operating models. This is about more than short-term compliance. The fast-changing political environment has major implications for the industry’s plans for growth.

Needless to say, Brexit is the most urgent consideration for many ETF providers. Most are confident that they will be able to manage its associated risks, but the prospect of a “no-deal” outcome is still a major source of uncertainty given the UK’s status as Europe’s largest ETF market and as a portfolio management center for ETFs domiciled in Ireland or Luxembourg.

  • Getting sustainable investment right

Sustainable investing continues to grow rapidly around the world. ESG-themed ETFs were reported to have gathered  US$38b in new money during the first seven months of 2020, reaching US$100b in AUM for the first time.6 That followed the volatility of March 2020, when ESG-themed ETFs were found to have outperformed the wider market. Sustainable investment represents a particularly important opportunity for the ETF industry, given the increased focus on nonfinancial outcomes among all investor groups.  EY’s ETF research shows that providers see ESG funds as the leading source of future growth and the key focus of product development. That includes funds with an ESG-themed overlay as well as thematic ETFs, especially those focused on climate change factors.

Even so, it would be a mistake to see ESG-themed ETFs as a one-way bet for promoters. Demand for sustainable investment may be growing fast, but so too are stakeholder expectations.

  • Rethinking customer journeys and experiences

Investors of all types increasingly demand solutions that let them achieve their long-term objectives, not just relative performance. All investment managers are under pressure to deliver a transparent investment approach tailored to clients’ financial needs — and their sustainability beliefs. This shift in behavior presents opportunities and challenges for ETF providers. On the upside, the growing depth of ETF offerings means that the industry can provide a full range of investment styles and strategies, including core passive, factor investing, thematic investing and active management. Set against that, the industry’s belief in the advantages of the ETF structure can make it hard to look beyond products and deliver compelling journeys oriented around investors.

  • Transforming business models with technology and data

ETF professionals expect investments in technology and data to help them enhance a range of core activities, including customer analysis (according to 71%), investment analysis (68%), product development (63%) and cost reduction (63%).

ETF promoters know that a strategic view of technology is crucial to developing scalable and sustainable business models. But real life and “winner takes all” dynamics often get in the way. Innovation is a key driver of inflows,  making speed to market a vital component of success. This can lead to a disconnection between the long-term investments that providers want to make and the need for ad-hoc investments to help bring new products to market or comply with new regulations.

Covid-19 has only made it more difficult for ETF firms to take a strategic view of technology and data. Resources have been diverted to enable remote working, and the physical dispersal of teams makes it harder to visualise and implement change — although altered ways of working could give firms access to new resource pools.

Our forecasts anticipate a CAGR of 10% in AUM for European ETFs over the next five years and expect global ETF assets to reach US$10t by 2025 – Lisa Kealy, EY EMEIA ETF Leader

The road to 2025

Competition has always been strong in the ETF industry, and recent years have seen growing pressure on margins and profitability. Covid-19 has only strengthened these dynamics, making further downward pressure on fees and profitability seem inevitable.

ETF providers that can develop and deliver an effective strategy for growth in the post-Covid world will be better placed than ever to create sustainable value for investors and society at large and, in the process, for themselves. Please download the ETF research below for a more detailed discussion of the topics raised in this article, and if you have a question, don’t hesitate to get in touch.

Thought Leaders

Lisa Kealy

Financial Services Markets Leader

Kieran Daly

FS Partner, Assurance, Wealth and Asset Management

Can ETFs scale new heights in an unfamiliar environment?

Having passed the Covid-19 test with flying colors, the industry is now challenged to digitalise distribution, develop new products, and navigate greater regulatory scrutiny.

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