ETFs to Grow to Half of Assets Under Management

Shanny Basar

Half of all assets under management will be in exchange-traded funds in five to ten years time according to Hector McNeil, co-chief executive of WisdomTree Europe, the ETF issuer.

McNeil spoke on a panel, ‘Who’s Winning the Active, Passive, Smart Beta Debate ?’, at the Thomson Reuters Lipper Alpha Forum in London this week.

Tim Gaumer, global director of fundamental research at Thomson Reuters, said on the panel that since 2009, $2 trillion of funds have flowed into passive funds versus just $150bn into active funds.

In the first three months of this year global ETF assets broke through the $3 trillion milestone for the second time on record according to preliminary data from consultancy ETFGI’s industry insights report. At the end of March the global ETF industry had assets of $3.07 trillion.

In comparison the global value of professionally managed assets grew to $74 trillion in 2014 according to the annual asset management survey from the Boston Consulting Group last July. The report said this was the third consecutive annual record and the industry’s profits rose to match their historic peak of $102bn.

The Boston Consulting Group report said the shift from traditional actively managed products to passive, solutions, and specialties held true in 2014 and will continue to squeeze the share of active core products and managers in the medium term.

Nitin Mehta, managing director for Europe, Middle East and Africa at CFA Institute said on the panel that competition is increasing in asset management and active managers need to work out how to respond.

“They will attempt to reduce costs and benefit from economies of scale which will lead to mergers,” Mehta added. “Managers will need to offer non-differentiated products and non-benchmarked products.”

McNeil added: “All asset managers need to have ETF strategy. ETFs have shed light on who truly adds alpha and highlighted that most active funds not create alpha.”

He added that managers using ETFs to construct portfolios is one of strongest growth areas in the US.

Bernhard Langer, chief investment officer of Invesco Quantitative Strategies, said on the panel that passive funds make sense in certain asset allocations.

“ETFs are a wrapper that must be filled with sustainable content,” Langer added. “

Langer continued that smart beta products will develop to include single factor products, style and macro funds and a combination of both. Smart beta and factor ETFs do not track standard market-weighted indexes but follow bespoke indexes which offer outcomes such as low volatility. They are more complex than standard ETFs and their risks need to be clearly explained to investors.

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