ETFs have revolutionised the asset and wealth management industry. Since their advent in the early 1990s, the promise of broad market exposure at low fees has enabled them to attract vast inflows of funds. A recent survey conducted by PwC of 60 global executives together accounting for over 80% of global ETF assets suggests that things are poised to get even more lively ‒ not just in terms of volume, but also because of a variety of themes and trends creating opportunities for the even broader adoption of ETFs.
There are four key study findings:
1. Growth projections: from strength to strength
Over the past five years, growth has built up massive momentum, with global ETF assets under management (AuM) almost tripling from USD 3.3 trillion in 2016 to over USD 10 trillion in November 2021. With ETFs having emerged from the pandemic stronger than ever, survey respondents expect the growth surge to continue. We believe a projection of over USD 20 trillion global ETF AuM by 2026 can be achieved. These growth prospects are phenomenal, but we think they resonate very well with the AuM growth of the biggest players (Blackrock and Vanguard) and the way they’re managing to increase their market dominance globally.
2. Product trends: differentiation through innovation
People often associate ETFs with a passive investment tied to market indices. But this is less and less the case in an increasingly active, diverse and innovative market. The emergence of an increasing breadth of products beyond pure index funds is remarkable in itself, and shows just how high expectations of ETFs are currently running. Equity and fixed income products are still the largest segments, but accelerated innovation is creating a wealth of investment opportunities and customer choice elsewhere in the ETF market. Survey respondents named thematic ETFs, active ETFs and crypto ETFs in particular as potential sources of untapped opportunity that will enjoy heightened demand in the next two to three years.
3. Distribution trends: digital take-off
The pandemic has made it difficult to engage face to face with advisers. This has encouraged more investors to switch to robo-advice and online platforms. The fact that ETF distribution is increasingly digital can reduce costs, boost accessibility and attract new investors. Survey participants believe the greatest demand in the next two to three years will come from online platforms, financial advisers and retail investors. Respondents also cite plans to tap into the Asia-Pacific and Latin American markets to build scale and market reach by setting up locally-domiciled ETFs, using their European UCITS passport or US ETF range to distribute into local markets, or partnering with a locally-based manager to launch local ETFs.
4. Delivering on ESG: keeping pace with stakeholder expectations
ESG looks like being the next major single development in money management, with a rapidly growing number of regulators, investors and societal stakeholders calling for sustainability considerations to be built into the global financial landscape. This trend opens up a wealth of product innovation opportunities for ETFs. Some providers are already responding to investor demand by creating bespoke indices focusing on environmental objectives. Our survey respondents have these opportunities on their radar and are overhauling their operations and product ranges accordingly. A whopping 45% expect more than 50% of their new products in the coming year to be ESG-focused. It will, however, be interesting to see how well fund houses are able to deliver against these expectations in a way that separates false from truly ESG-compliant products.
The study concludes with four points businesses should priorities to keep pace with the growth and challenges of the ETF market:
- Be ready to move quickly: The leap in products and strategies such as active ETFs, crypto ETFs and thematic ETFs could come quickly. So it’s important to plan how to get ahead of the curve or at least keep pace. If you don’t, your competitors will.
- Stand out from the pack: It’s crucial to find ways of differentiating your business through products, distribution and investor education.
- Move ESG into the mainstream: With ESG no longer just a niche segment, it’s important to build it into strategy, operations and governance throughout the business.
- Be prepared for greater regulatory scrutiny: Complexity, market size, retail clients and business on robo-advice and online platforms, the use of bespoke indices and the significance of ESG to retail investors all add up to greater regulatory scrutiny.
The survey points to exciting times of opportunity ‒ but also challenges.
These include the current market environment and significant shocks (war in Europe, skyrocketing oil prices and sanctions). We are curious to see how fund providers will be able to cope with this stress scenario, particularly for synthetically replicating funds.
Feel free to call us if you’d like to discuss the study or any other ETF-related matters in more depth.
