EY report points to future drivers of ETF industry growth

Oct 25th, 2016 | By | Category: ETF and Index News

Assets under management within the global exchange-traded fund industry are on track to reach $6tn by 2020, from an asset base of $3.4tn as of August 2016, according to research from multinational professional services firm EY. The “EY Global ETF Survey 2016” identifies product development, market entry and digital disruption as key factors to sustaining the required annual growth rate of 21.5%, as averaged over the past decade.

Ernst Young report highlights future drivers of ETF industry growth

Lisa Kealy, EMEIA ETF Leader, Ernst & Young.

Lisa Kealy, EY EMEIA ETF Leader, commented: “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.”

To compile the report, between July-August 2016, EY interviewed more than 70 leading ETF providers, investors, market makers and service providers across the US, Europe and Asia-Pacific. The sample includes respondents at issuers managing 86% of global ETF assets.

Product development

Providers are arguably more focused on product development than at any time in the sector’s history as new products are considered vital to sustaining growth rates.

New products may boost profitability at firms as the higher fees that specialized products command may help to offset pricing pressure on existing ETFs. The survey found that innovation is seen as the leading source of differentiation – new entrants depend on eye-catching products to stand out from the crowd, while incumbents rely on new products to open fresh conversations with investors – while range of products offered came in at second place.

Fixed income is seen as the asset class most likely to see greater product development with 85% of respondents expecting to see continued development in this space. Smart beta and active products were also deemed highly important with 67% expecting these strategies to support industry growth for at least five years.

Market entry

Ninety percent of survey respondents globally expect more new players to enter the market while the figure was 100% among US respondents. Active managers (22%) and asset managers with no current ETF offering (20%) were identified as most likely to enter the market in the next two years.

Geographically, Asia-Pacific remains the most popular target for growth from existing ETF providers with 41% of global respondents planning a move into the region. This figure was notably higher among US-based providers. Also, almost a third of Asia-Pacific providers reported interest in expanding into Europe or the US in the near future.

Julie Kerr, EY Asia-Pacific ETF Leader, commented: “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.”

Digital distribution

The survey also highlighted concerns from providers that ETFs are lagging behind other industries in terms of 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.

Respondents pointed to the emergence of robo-advisors – online wealth management services providing automated, algorithm-based portfolio management advice without the use of human financial planners – as a scalable retail channel which could drive progress in this area. A resounding 88% of respondents expect robo-advisors to accelerate ETF growth while nearly half (45%) think robo-advisors will deliver in excess of 10% of annual inflows within three to five years.

Matt Forstenhausler, EY Global ETF Leader, said: “The industry needs to embrace digital innovation and investors’ appetite for digital technology to define a new distribution model. Smart firms will be those that address immediate and long-term challenges to offer existing and future customers an improved, integrated approach. Taking control of the digital agenda means ETF providers will not only continue growing but do so in a way that lays the foundation for sustainable profitability.”

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