Ex­change-traded fund mar­ket set to nearly dou­ble by 2020

Malta Independent - - BUSINESS & FINANCE -

Strong growth in ex­change­traded 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.

Ron­ald At­tard, Coun­try Man­ag­ing Part­ner for EY Malta and CSE TAS Leader, says: “All three themes listed be­low seem to fo­cus on one cen­tral el­e­ment, that of con­stant change due to in­no­va­tion. Coun­tries need to be con­stantly on the ball in or­der to at­tract in­vestors and look out for what’s new. On the other hand, com­pe­ti­tion is get­ting more in­tense as there are count­less op­por­tu­ni­ties for new en­trants in the mar­ket, re­sult­ing in chal­lenges to de­liver con­tin­ued ex­pan­sion and achieve scale.”

Prod­uct de­vel­op­ment

Prod­uct de­vel­op­ment con­tin­ues to grow in im­por­tance in the ETF in­dus­try. And yet the ma­jor­ity (64 per cent) of providers ex­pect new prod­ucts to be­come less suc­cess­ful in the fu­ture. The con­tra­dic­tion stems from the fact that prod­uct sup­ply is reach­ing sat­u­ra­tion point. The growth of more com­plex ETFs is mak­ing it more dif­fi­cult for pro­mot­ers to test new prod­ucts – es­pe­cially when the fo­cus re­mains on speed to mar­ket rather than build­ing a tai­lored ap­proach to in­no­va­tion.

Mar­ket en­try

The rapid growth of ETF as­sets con­tin­ues to at­tract new en­trants to the in­dus­try. Ninety per cent of sur­vey re­spon­dents ex­pect more new play­ers to en­ter the mar­ket and, in the US, the figure is 100 per cent. Re­spon­dents iden­ti­fied ac­tive man­agers (22 per cent) and as­set man­agers with no cur­rent ETF of­fer­ing (20 per cent) 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 per cent 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 per cent of re­spon­dents have lit­tle ap­petite for ac­qui­si­tion-led growth, larger pro­mot­ers con­tinue to ac­quire smaller ones in many ETF mar­kets. And 60 per cent of those sur­veyed ex­pect to see fur­ther con­sol­i­da­tion over the next two years.

Dig­i­tal dis­tri­bu­tion

The ETF in­dus­try lags be­hind when it comes to in­no­va­tive dis­tri­bu­tion mod­els. Only 10 per cent of sur­vey re­spon­dents be­lieve their dis­tri­bu­tion model is suit­able for to­day and the fu­ture, com­pared to 20 per cent who view it as out­right in­suf­fi­cient.

The emer­gence of robo-ad­vis­ers – an on­line wealth man­age­ment ser­vice that pro­vides au­to­mated, al­go­rithm-based port­fo­lio man­age­ment ad­vice with­out the use of hu­man fi­nan­cial plan­ners as a scal­able re­tail chan­nel – could change this pic­ture. Eighty-eight per cent of re­spon­dents ex­pect robo-ad­vis­ers to ac­cel­er­ate ETF growth. And nearly half (45 per cent) think robo-ad­vis­ers will de­liver in ex­cess of 10 per cent 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 – and in­vestors’ ap­petite for dig­i­tal tech­nol­ogy – 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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