Exchange-traded funds represent the future of asset management, thanks to their ability to provide investors safe and liquid exposure to multiple asset classes.

That’s the view of Kiran Pingali, head of ETF product development at Bloomberg Tradebook. In an interview with Markets Media, Pingali said that as a more passive investment compared with mutual funds or equity securities, total ETF assets under management may increase to as much as $10 trillion over the next five to eight years, up from a bit more than $3 trillion currently.

“More and more institutions are using ETFs as part of their strategies – especially as ETFs moved away from being a retail product that focused on beta rather than an institutional product that can produce alpha,” Pingali said. “Pension funds and hedge funds have now adopted the product.”

Pingali noted that it took 18 years for the ETF market to reach $1 trillion, but then only four years to reach $2 trillion.

As further evidence of the sector’s growth, Pingali pointed to the explosion of ETF volume being executed on Tradebook’s ETF RFQ service which has seen U.S. volume triple during the first quarter of this year when compared to one year ago. Notional value traded also tripled in European ETFs as the number of investors actively using the ETF RFQ service expanded by more than half.

Market volatility and the demand for block liquidity in ETFs drove the value of the total ETF market to new highs, industry analysts report. According to research firm ETFGI, assets in global ETFs topped $3 trillion at the end of 2015.

Access to liquidity and trading volume are important considerations for ETF investors, Pingali continued.

“In the United States, liquidity is concentrated in the top 150 ETFs by AUM, with more than 90% of them trading less than 1 million shares per day,” Pingali said. “Europe faces its own challenges in sourcing ETF liquidity because of market fragmentation and low transparency due to deficiencies in trade reporting.”

He added that two sectors that he expected to continue to grow amid investor appetite for liquid holdings would be ETFs backed by commodities and fixed income. “Institutions are using commodity-backed ETFs as both a hedge or to better take a position in the cash commodities market,” Pingali said. “Hedge funds and long-only funds are the drivers in this space. These ETFs give the buy side liquid and safe exposure to either a country or asset class.”

As for fixed income, he said that while the entire fixed-income universe totaled upwards of $39 trillion, fixed income ETFs totaled only $350 billion or roughly 1% of the underlying asset.

“We see fixed-income as an opportunity for huge growth in ETFs based on these numbers,” Pingali said. “Also, ETF growth here adds liquidity to the underlying bond market as well and can be a safety net in times of fixed-income stress.”

Featured image by monamis/Adobe Stock