Strong growth in exchange-traded fund (ETF) assets is expected to continue with assets under management on track to reach $6 trillion 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 cent per annum and with assets under management valued at $3.4 trillion 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, said: “All three themes listed below seem to focus around 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 a 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, said: “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-advisors – 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-advisors to accelerate ETF growth. And nearly half (45 per cent) think robo-advisors will deliver in excess of 10 per cent of annual inflows within three to five years. The report suggests promoters will need patience to realise long-term benefits, however.
Matt Forstenhausler, EY Global ETF Leader, said: “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.”