The UK is entering a period of accelerated growth for indexing across wealth portfolios, driven by greater confidence in ETFs and a growing appetite for sustainability, according to BlackRock.
Current levels of 10% to 20% within the portfolios of financial advisers, traditional and digital wealth managers, and private banks will double in the next four years, according to the asset management giant, driven by three key market trends:
• Greater confidence in ETFs as they prove their worth in periods of market stress;
• Growing choice for efficient portfolio construction; and
• Widespread appetite for embedding sustainability into asset allocation decisions.
Nick Hutton, head of UK iShares & Wealth at BlackRock, said: "What we are seeing as the UK wealth management industry evolves is a fundamental and irreversible shift towards a 'whole portfolio' approach that aims to identify true sources of portfolio returns that is putting a spotlight on the role of index funds and ETFs.
"Faced with fee compression, regulation, and the centralisation of business models, indexing can help clients build more efficient, more nimble portfolios than ever before."
Looking more closely at these three key market trends, BlackRock said the pandemic-related market turmoil of early 2020 "provided the most significant stress test of the resiliency of bond ETFs".
For BlackRock, past experience "shows us that each time ETFs demonstrate their robustness and utility through periods of market volatility, more investors learn about and become open to the role they can play in portfolios and become first time users".
Furthermore, it added that when investors start using ETFs, they tend to increase usage over time and become long-term adopters.
On greater choice given to investors, Brett Pybus, head of iShares Investment and product strategy EMEA, said: "In the 21 years since the launch of ETFs in the UK, ETFs and index funds have evolved from principally replicating simple market cap-weighted indices such as the FTSE 100 or S&P 500 to identifying and capturing sources of return such as factors, themes, countries or sectors in a repeatable way that was previously only available via alpha strategies."
"These milestones reflect the ability of ETFs and index funds to efficiently standardise data and technological advancement to the benefit of the investor."
As investors shift their focus towards sustainability, BlackRock also predict that as the market adapts, investors can achieve greater alignment between their intended exposures and the sustainable products used in the implementation stage.
Ursula Marchioni, head of portfolio analysis and solutions EMEA, said: "We are seeing many more institutional investors view sustainability not only in terms of product selection but as a central consideration in their core investment process.
"We believe wealth portfolios will follow suit, leading to a material increase in the use of sustainable products, including ETFs, in the coming years.
"The performance of sustainable indices over the past year - with 81% of indices outperforming their traditional peers - will further support their adoption. BlackRock believes global sustainable ETFs and index mutual funds' assets will grow six-fold to $1.2trn within the next decade."