ETF industry expects about 18% annual growth over next five years

Exchange traded fund (ETF) businesses expect to grow by nearly 18% per year for the next three to five years, as they continue to gain market share from traditional active asset managers and passive mutual funds, though pricing and profitability concerns remain.

Institutional investors are increasing their allocations to ETFs and innovative products are driving ETFs growth, according to the EY Global ETF Survey 2015 ETFs: a positive force for disruption.

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. United States of America continues to lead the ETF market, though Europe and Asia see growth. US ETF providers now manage $1.905trillion 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.

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.

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).

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

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. 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.”

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.”

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.”