Exchange traded funds (ETFs) assets under management is expected to at least double, to reach US$5 trillion or more by 2020. This exponential growth comes as new investor segments continue to integrate ETFs into their portfolios and fund sponsors introduce more products.
ETFs will play an increasingly prominent role in the growth of professionally-managed financial investments globally which are expected to grow at 6% annually, reaching US$100 trillion by 2020. These findings are revealed in a PwC's new report ETF 2020: Preparing for a new horizon (ETF 2020). PwC surveyed executives from 60 ETF sponsors, asset managers and service providers around the world that account for over 70% of global ETF assets.
According to ETF 2020, asset flows in the developed markets of the US and Europe will continue to dominate the ETF landscape. However, the highest rates of growth will be found in the less mature markets, particularly Asia, although the region currently only accounts for about 7% of global ETF assets. Survey participants expect ETF demand in Asia would mainly come from insurance companies, retirement plans and hedge funds.
"The sheer number of investors in Asia, not to mention a growing economy, rising middle-class and a rapidly evolving financial services landscape mean that the region is likely to contribute significantly to the growth of the ETF market in the coming years. The internationalization of the renminbi will see a further acceleration of capital flows, which will really open up what will become one of the world's most important asset management markets," says Maria Tsui, Asia ETF leader, PwC Hong Kong.
In Asia, many players still see traditional indexing as the major growth opportunity, followed by new types of indexing, as opposed to active ETFs in the US. From a product perspective, Korea, Japan and most recently Taiwan are seen to be more innovative markets, where leveraged and inverse ETFs have been launched.
ETF sponsors are bullish on their financial prospects with 59% expecting their ETF business to become more profitable this year. Technology upgrades, resources and processes will be critical as the ETF landscape becomes more global and advanced, with a wider array of investors and new investment strategies offered in ETF form.
It is widely believed by survey participants that the regulatory environment will have a significant impact on the growth and innovation of ETFs over the next few years, with 91% indicating that regulations and taxes impact ETF growth. PwC notes, however, that while new regulations could spark further growth if they permit further product innovation or lower distribution barriers; they could also dampen demand, particularly if new tax rules make ETFs less tax efficient.
"Shifts in the regulatory environment will continue to produce opportunities that will favour firms with local market knowledge. The ability to transform ETFs into effective solutions that address the needs of specific investor segments will be a particularly important factor in competing successfully," says Nigel Brashaw, global ETF leader, PwC US.
In Asia, effective distribution is seen as the number one challenge for ETFs, where the use of commissions encourages the use of mutual funds rather than ETFs, unlike some other markets where fee-based investment advice is a lot more common. This has encouraged players to look for more innovative and non-traditional distribution platforms, perhaps similar to the fund supermarket in South Korea and various online platforms in mainland China.
"There are many developments that may have a positive effect on ETF markets in the region. Fund passports for one. For example, the Asean passport for Malaysia, Singapore and Thailand, operational since August 2014, means retail funds (including physical ETFs), can be offered directly to investors in any of the three markets. Many players are also hoping that with the impending mutual recognition between Hong Kong and Mainland China, and the proposed Asia Region Funds Passport, a more open market will be made available to allow them to expand regionally or even beyond, should ETFs be included within their scope, although detailed rules have not yet been finalized," says Tsui. "Additionally, there is the Shanghai-Hong Kong Stock Connect which could create additional opportunities for ETFs, again if they are added to its scope."
