The majority of asset managers will have some form of ETF offering in the near future with many new entrants focusing on fixed income and smart-beta, according to a report by advisory services provider EY.
The report, entitled Global ETF Research 2017: reshaping around the investor, found 67% of the surveyed 70 ETF promoters, market makers and service providers believed most asset managers would launch ETF products over the next five years.
The report said: "Within five years, almost all asset managers will offer passive or active ETFs.
"This reflects a variety of strategic goals, including competing in the ETF space; defending against the "hollowing out" of mutual funds; and tapping into digital distribution."
Therefore, Lisa Kealy, EMEIA wealth & asset management ETF leader at EY, said it was crucial ETF providers developed the right products for the "right investors, at the right time" if they were going to avoid "disappointment" and achieve the long-term, sustainable growth in the ETF market.
The report said fixed income products would drive ETF growth in the medium term, predicting global fixed income assets to hit $1.6trn by 2020 versus $600bn for the end of 2016.
"Fixed income ETFs will remain the industry's greatest area of focus over the next few years," Kealy said. "They have huge untapped appeal to medium-sized institutions that might otherwise struggle to access corporate, high-yield or emerging market debt."
Smart-beta was another area, Kealy expected would double to $1.2trn by 2020 as "they are relatively simple to launch, and have broad institutional appeal as a substitute for mutual funds, making them a popular entry point for traditional asset managers."
Kealy also outlined key areas providers should focus on in order to get ahead of the competition; anticipate investor needs; remember the big picture; look beyond the short term and focus on education.
"Taking advantage of short-term openings is one of ETFs' strengths," Kealy said. "But promoters need to keep an eye on longer-term opportunities, too. This could include new adaptations such as multi-asset ETFs, or listing UCITS ETFs in new regions such as the Middle East.
"Promoters need to confirm all investors fully understand the products they use. The rapid rise of smart beta ETFs — often sold on the basis of paper-based performance — makes it more important than ever to avoid disappointing investors."
The report predicted the ETF market would hit $7.6trn by the end of 2020 with almost half of respondents (47.6%) forecasted ETFs' growth rate would be between 10% and 15%, while 31% said between 15% and 20%.
It also noted the ETF market currently totalled $4.4trn, as at September, up from $417bn in 2005 and growing at an average rate of 21% per annum.
One of the key drivers of this future growth, the report said, would be the disruption of digital technology.
Kealy said providers could use technology to improve relationships with financial advisors and wealth managers, enhance direct connections with retail investors, leverage the continued growth of robo-advisors and work with fund platforms to develop intraday trading.
She said: "Even so, it will take time, patience and a sustained effort on education to grow retail adoption, especially outside the US and Australia. Even robo-advice will not be a game changer in the near future."
Regulation, the report said, would continue to have an increasingly positive impact on the ETF market with 61% of respondents predicting regulation changes would change the way ETFs are distributed.
Matt Forstenhausler, global and Americas wealth & asset management ETF leader at EY, said: "The inherent strengths of the ETF vehicle — not least, transparency and low costs — mean the industry sees little to fear from regulation.
"In Europe, MiFID II will also restrict the inducements asset managers can pay to distributors. We expect ETFs to continue to benefit from the global regulatory focus on eliminating bias and improving transparency."
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