NEW YORK, OCTOBER 25 2016. Strong growth in exchange-traded fund (ETF) assets is expected to continue with assets under management (AuM) on track to reach US$6t in value by 2020, according to EY Global ETF Survey 2016 Integrated innovation: The key to sustainable growth. This predicted growth follows a decade of growth in the industry, averaging 21.5% per annum and with AuM valued at US$3.4t as of August 2016.
As the industry grows, however, it is becoming progressively more difficult for firms to deliver continued expansion. The report identifies product development, market entry and digital disruption as particularly important spaces to apply an integrated approach to innovation in order to achieve sustainable growth in the industry.
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Lisa Kealy, EY EMEIA ETF Leader, says:
“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.”
Product development continues to grow in importance in the ETF industry. And yet the majority (64%) of providers expect new products to become less successful in the future. The contradiction stems from the fact that product supply is reaching a saturation point. The growth of more complex ETFs is making it more difficult for promoters to test new products ¾ especially when the focus remains on speed to market rather than building a tailored approach to innovation.
The rapid growth of ETF assets continues to attract new entrants to the industry. Ninety percent of survey respondents expect more new players to enter the market and, in the US, the figure is 100%. Respondents identified active managers (22%) and asset managers with no current ETF offering (20%) as the type of promoters likely to enter the market in the next two years. Geographically, Asia-Pacific remains the most popular target, particularly among US respondents, but also for European and Asia-Pacific promoters with 41% of respondents planning expansion in this market.
Julie Kerr, EY Asia-Pacific ETF Leader, says:
“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.”
The report reveals that, despite the finding that 74% of respondents have little appetite for acquisition-led growth, larger promoters continue to acquire smaller ones in many ETF markets. And 60% of those surveyed expect to see further consolidation over the next two years.
The ETF industry lags behind when it comes to 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.
The emergence of robo-advisors ¾ an online wealth management service that provides automated, algorithm-based portfolio management advice without the use of human financial planners ¾ as a scalable retail channel could change this picture. Eighty-eight percent of respondents expect robo-advisors to accelerate ETF growth. And nearly half (45%) think robo-advisors will deliver in excess of 10% of annual inflows within three to five years. The report suggests promoters will need patience to realize long-term benefits, however.
Matt Forstenhausler, EY Global ETF Leader, says:
“The industry needs to embrace digital innovation ¾ and investors’ appetite for digital technology ¾ 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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About the report
In July-August 2016, EY interviewed more than 70 leading ETF promoters, 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. ey.com/etfsurvey2016
About EY’s Global Wealth & Asset Management Sector
The global wealth and asset management sector has rebounded from the global financial crisis to face a rapidly evolving regulatory environment and changing client base. Organizations are keenly focused on efficiently adapting to change, managing complex risks and growth in an increasingly crowded field. EY’s Global Wealth & Asset Management Sector brings together a worldwide team of professionals to help you succeed — a team with deep experience in providing assurance, tax, transaction and advisory services. The Sector team works to anticipate market trends, identify their implications and develop points of view on relevant sector issues. Working together, we can help you meet your goals and compete more effectively.