Exchange-traded funds have stolen fizzy lifting drinks!
In appreciation for the untold billions of dollars in fees that investors have saved since ETFs’ inception in 1993, the investing world has sent the industry’s assets under management into the sky. Over the past five years alone, global AUM across exchange-traded funds more than doubled to nearly $3 trillion.
And if a new survey is any indication, ETFs have a long, long way to go before they’ll run into any kind of ceiling.
Which is good, because it would have to be washed.
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ETFs are expected to grow to $6 trillion by 2021. A new study — “ETFs: A Roadmap to Growth” — predicts that the industry will roughly double again over the next five years. Nearly 70 percent believe the ETF industry will reach $6 trillion or more by 2021, with 40 percent of respondents pegging that number at $7 trillion or more. The most optimistic respondents actually believe ETF AUM can hit 14 digits, estimating assets of $10 trillion or more in five years.
Even the remaining 30 percent fell into a basket consensus of “$5 trillion or less,” so at least some of those respondents expect some measure of growth from the ETF industry.
The general air of bullishness on the industry comes in large part because there’s no single thing pushing ETFs forward. Instead, experts point to a host of various drivers that collectively will attract those trillions of dollars in assets.
Institutional money. Many individual investors have been drawn into ETFs for their well-worn set of attributes, such as easy diversification and relatively low fees for index ETFs compared to actively managed funds (and even other index mutual funds).
But the use of ETFs is starting to pick up among big-money institutional investors.
“In addition to the outright purchase of ETFs from end investors, ETFs are increasingly being deployed in institutional strategies,” says Karan Sood, CEO and co-founder of Vest Financial. “One well-reported usage that is driving assets and trading volumes is the growing use of ETF model portfolios by advisors in managing client assets.
Nick Good, co-head of the Global SPDR Business at State Street Global Advisors, is seeing much of the same.
“I do think there are a number of big trends around institutional users, particularly insurance companies, increasing their usage, in some cases for core allocations, in some cases for satellite exposure,” he says. “But also just as they are more and more capped for market instruments, they are replacing futures for ETFs, which is a big trade for many of our funds.”
And why not? Just like individuals, institutional investors can benefit from many of the advantages ETFs offer.
“More and more institutional investors are saying they don’t need that asset manager in the mutual fund form when they can get 95 percent of the same exposure and do it at half the cost and more tax-efficiently,” says Reality Shares CEO Eric Ervin, who sees this shift as the primary thing pushing ETF assets ahead.
“It’s intelligent people making intelligent decisions in the way they’re allocating their capital.”
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Smart-beta ETFs. Investors are plenty familiar with the old guard of the exchange-traded world — the index fund. Rather than an active manager picking stocks, you have funds like the SPDR S&P 500 ETF (ticker: SPY) that simply track a single index of holdings. These ETFs tend to beat out their actively managed counterparts, and because there’s no manager and far less staff to pay, they typically charge much less in fees.
But index funds are becoming more complex, with ETF providers slicing and dicing indices to create more specific strategies, such as equal-weight funds and low-volatility ETFs, but still bypassing active management. And the experts think this area of the industry will do a lot of heavy lifting.
“We expect market-cap weighted passive ETFs to continue to drive some of the ETF growth across North America, Europe and especially in Asia,” says Bill Donahue, managing director with PricewaterhouseCooper’s asset management assurance practice. “However, smart-beta ETFs, which have been the fastest-growing ETF category for the last couple of years, will continue to drive a lot of the ETF AUM growth.”
Ervin touts the idea that with smart-beta funds, you’re essentially getting an active strategy without straining your pockets.
“I like taking all the rules of an active manager,” he says. “Let’s take the universe of large-cap companies, now let’s take all the dividend payers, then let’s take the lowest P/E, the best fundamentals. You no longer really need that active manager — the ETF has 95 percent if not 100 percent of the benefit that the active manager was giving you, and you don’t have to pay him.”
Robo-advisors. Investors are increasingly awash in the rise of robo-advisors. Like index funds take out the human element from selecting fund holdings, robo-advisory services take out (or at least limit) the human element from constructing a portfolio.
So it just seems natural that they would have a pro-ETF bent.
“Many ETF sponsors have either acquired existing robo-advisor/online platforms or created their own service offerings over the last few years,” Donahue says. “The robo-advisor/online platform provides for the ETF sponsors to potentially reach a broader investor base in a more efficient and cost effective manner. Robo-advisors and online platforms use ETFs as a significant part of the investment allocation strategies due to their low cost, transparency and liquidity.”
More of the same. Lastly, experts expect the traits that made ETFs popular in the first place will continue to drive ETF assets as part of a trend that simply hasn’t ended — ETFs continuing to eat into mutual funds’ lunch.
“I think the biggest driver is ongoing uptake as investors bring more of their assets into the market and ETFs take a disproportionate share of fund flows,” Good says. “I think the drivers that have led to the growth have been there for a long time, and it takes a long time in the asset management industry for those trends to change.”
That trend is increasingly in ETFs’ favor. Thomson Reuters reported near the end of 2015 that mutual funds suffered $150 billion in outflows. ETFs? About the same amount in inflows.
Don’t expect that to surprise the likes of Ervin.
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“The ETF is a better vehicle,” he says. “Had ETFs been around in the 1920s when mutual funds were invented, we probably wouldn’t have a mutual fund industry.”
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Why the ETF World Could Double by 2021 originally appeared on usnews.com
Correction 07/22/16: The headline on this story was changed to correct the date.
