Passive Assets Could Exceed Active By 2027
Professional stock pickers face sustained headwinds.
Assets under management in passive funds will be larger than active funds by 2027 according to the fifth annual study of global exchange-traded funds from EY.
The study, Reshaping around the investor: Global ETF Research 2017, predicted ETF asset growth of approximately 15% per annum for the next three to five years, up from $4.4 trillion at the end of September 2017. EY surveyed 70 ETF promoters, market makers and service providers who manage 85% of global ETF assets between May and September 2017.
“If anything, we think this understates the industry’s growth potential,” added EY. “We believe global ETF assets could reach $7.6 trillion by the end of 2020 — equivalent to a compound annual growth rate of of approximately 18% (13%- 14% of which will come from net new inflows) — underpinned by the shift to passive, the size of ETFs relative to the overall market and ETFs’ suitability for digital distribution.”
The study continued that there is an increasing consensus that both active and passive strategies can create value within most portfolios. In addition ETFs will continue to benefit from low fees intraday liquidity. “For example, the highest ever days of UK ETF trading occurred immediately after the Brexit vote and the 2016 US presidential election,” added EY.
Two-thirds of respondents believe most managers will have an ETF offering in the next five years.
Roger-Marc Noirot, chief operating officer – passive asset management, Deutsche Asset Management, said in the report: “ETFs will increasingly be the main input into the assembly line of asset managers and allocators. They allow the chassis to be built, freeing up time and resources for managers to concentrate on alpha sourcing.”
Many new entrants will focus on fixed income ETFs, especially for medium-sized institutions cannot easily access corporate, high-yield or emerging market debt. EY said: “We expect global fixed income ETF assets to reach $1.6 trillion by 2020, compared with $0.6 trillion at the end of 2016.”
Another focus will be smart beta, where ETFs do not track standard market cap-weighted indexes, but instead use indexes weighted towards factors such as low volatility or dividend yield. The study predicted that global smart beta ETF assets will reach $1.2 trillion by 2020, double the $0.6 trillion at the end of last year.
However nearly half, 44%, of respondents said the cost of indexes is too high and expect new providers to enter the market — including from within the ETF industry itself. EY said: “Barriers to entry are high, with investors typically preferring recognized brands with a reputation for accuracy. As a result, some of the industry’s largest promoters are becoming interested in the possibilities of self-indexing.”
This also reflects the increased margin pressure in ETFs as more managers enter the market, which EY said creates valuable opportunities for service providers that can support the detailed regulatory, reporting and risk management requirements of ETFs.
“We see huge potential for robotic automation and cognitive computing to create value,” added EY. “Several global custodians are investing heavily in their ETF capabilities, but the build-up of human and technology costs will present asset servicers with their own margin challenges.”
White label providers will also offer an increasingly popular way for new entrants to overcome barriers to entry. “They can help with regulatory approval, seed capital, product development and listings, and provide introductions to market makers, authorized participants and other liquidity providers,” added EY.
This week HANetf, which provides a turnkey solution to new entrants in the European ETF market, announced it had completed a seed funding round.
HANetf was launched by Hector McNeil and Nik Bienkowski, who helped found and establish ETF Securities and then Boost ETP, which was acquired by WisdomTree in 2014.
Bienkowski, founder and co-chief executive of HANetf, said in a statement: “We believe that every asset manager needs an ETF product strategy and some form of ETF offering within the next five years. As a result, HANetf expects to support more than 100 ETFs in the next 5-7 years.”
Assets under management in ETFs/ETPs listed in Europe increased by 31.2% in the first nine months of this year to reach a record of $751bn according to ETFGI, an independent research and consultancy firm. Inflows in the first three quarters were a record $85.7bn, more than the $55.7bn gathered in the whole of 2016.