ETFs are expected to receive more than double the combined flows into active and passive mutual funds by the end of 2020 with technology, innovation and transparency all contributing factors.
While respondents expect the number of ETFs to continue to rise, a majority 64% believe new launches will be less successful in future.
While until recently, better due diligence was seen as improving the effectiveness of product development, as innovation flourishes, and more complex ETFs come to market, it becomes harder for product providers to properly test and seed new products while achieving speed to market.
New funds drive growth
In its Global ETF Survey 2016, Integrated innovation: the key to sustainable growth, the consultancy reports the findings of more than 70 global ETF players responsible for 86% of global ETF assets.
New products are key to sustaining growth rates, with 67% of respondents expecting smart beta and active products to support industry growth, while profitability will improve through investment capabilities as the higher fees on more specialist products offset the low costs of more vanilla products.
Fixed income, ESG and currency hedging are also set to rise as an increasingly competitive space, demands innovation in order to differentiate.
Andrew Walsh, executive director, ETF at UBS said: “Socially responsible investing is certainly an area of increasing importance. Now, there’s far more awareness of the merits of passive SRI ETFs – notably that they are very competitively priced and can in fact offer equal, if not better, performance than standard plain vanilla benchmarks.”
ETF AUM is expected to grow from $3.4trn(£2.8trn, €3.11trn) to $6trn by the end of 2020, and EY has identified four strategic priorities for providers must adopt if this level of growth can continue.
These are: smart, sustainable product development; creativity in the search for scale; transparency related to products, performance and pricing; and control of the digital agenda.
As 2016 has been the most geopolitically unpredictable year since the financial crisis, the number of industry players seeing the macro uncertainty as an opportunity outnumbers those seeing it as a threat by a ratio of 2:1.
Meanwhile with the rise of fintech across financial services, providers are recognising the importance of digital distribution, though the jury is still out on whether robo-advice will be the optimum solution.
Of the survey respondents, 88% said they expected robo-advisers to accelerate ETF growth, with nearly half believing they could increase industry asset flows by more than 10% in three to five years.
That said, two-thirds of those interviewed believe it will take that long to deliver against growth expectations, while a quarter believe it will take at least five years.
The report said while robo-advisers were gathering “billions of assets” in the US, in Europe and across Asia Pacific markets they are seen many as “overhyped”.