ETFs continue to grow so rapidly that they could overtake hedge funds in total assets under management by the end of the year, even though some people think of the US ETF market as having already matured.

US ETF market growing at 15% annually

“US ETF assets represent more than 70% of the global total,” writes Ernst and Young ETF leader and EMEIA asset manager Lisa Kealy. “But while annual growth may have slowed from its ten year average of more than 25%, the US market is still expected to expand by more than 15% annually – hardly a sign of maturity.”

ETF market maturity may be difficult to judge because cross-border investments are so common. European and Asian investments make up a lot of US ETF inflows, even as their local ETF markets have annual growth rates of 15-20% and 20-30% respectively and arguably more room for growth.

“We predict annual growth rates of 15% – 30% around the globe over the coming five years, and believe the ETF industry could surpass the hedge fund industry in assets under management during the next 12–18 months,” writes Kealy.

ETF market must deal with new taxes, regulations

The EY survey found that investors expect more entrants to the ETF market in the coming year, and that promoters expect to offer more products, but that doesn’t mean the business doesn’t have to deal with its fair share of challenges, partially because of its growing popularity.

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The European ETF suffers from fragmentation, and since liquidity is one of the main draws for ETF investors, the lack of a common settlement system holds back investment. As the asset class becomes more familiar, and as less sophisticated investors get involved, regulatory bodies are paying closer attention to ETFs.

Increased regulation may be unavoidable, and promoters need to actively engage with regulatory bodies to make sure that new rules don’t prevent them from competing in the global ETF market. In a similar vein, Europe’s Financial Transactions Tax would make it difficult to use ETFs as an easy source of liquidity, and according to Kealy “this prospect is alarming our interviewees more than any other regulatory initiative.”