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Published 29 March 2023
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While the 28.8% Exchange Traded Fund (“ETF”) assets under management (“AuM”) growth and impressive $1.2 trillion of ETF net inflows in 2021 was always going to be a hard act to follow, the sector managed to record the second highest annual ETF net inflows of $779.4 billion, with global ETF AuM at $9.2 trillion in December 2022. The resilience of ETFs is especially evident when the net inflows achieved by ETFs are contrasted with $1.4 trillion net outflows from mutual funds in 2022.
In light of the continued economic uncertainty, what does the future look like for the ETF sector?
To gain answers and insight into the breadth of possibilities for the ETF landscape of tomorrow, we conducted a survey of more than 70 executives, three quarters of which were ETF managers or sponsors.
Key findings
1. Growth projections: Capitalising on untapped potential
While our survey was carried out at a time of mounting financial market uncertainty, 70% of respondents expect that global ETF AuM will grow to $15 trillion or more by 30 June 2027. Nearly a third of respondents (29%) are more bullish and expect that ETF AuM will more than double to reach at least $18 trillion by this date. This would represent a CAGR of 11.77% and 15.92% respectively.
Despite the record growth rates achieved by ETFs in recent years, the ETF market still offers a huge amount of untapped potential for asset managers to support investors’ needs. The impetus for further growth will be underpinned by an acceleration in ETF product innovation, moves into new and underpenetrated investor segments and new markets where ETFs are a relatively new investment product.
2. Product trends: Reaching out beyond the core
Product innovation and diversification are opening up opportunities for a fresh surge in growth.
While traditional passive equity products remain the largest segment of the ETF market and respondents expect that demand from investors for these products will continue to be significant, fixed income ETFs are expected to continue their strong growth rates, with 69% of US respondents and at least 60% in the other regions expecting significant demand over the next two to three years.
Survey respondents also expect demand for active ETFs to increase over the next two to three years. This would continue a trend whereby active ETFs constitute a small but quickly growing portion of the ETF market. In the US, where active ETFs are already well-established (around 5% of overall ETF AuM, compared to 1.5% in Europe), ETF managers are especially optimistic with 74% respondents expecting significant demand over the next two to three years. While not a deterrent to market entry in Europe, the regulatory landscape regarding portfolio disclosure requirements continues to be an area of interest for active managers.
While thematic ETFs have seen lower net inflows in 2022 as compared to 2021, survey respondents continue to see opportunities with over 63% in each region expecting significant demand for these products over the next two to three years. Europe continues to lead the way on ESG investment products, with 21% of the ETF AuM in the region classified as ESG. European respondents are also most bullish on future investor demand for ESG ETFs with over two-thirds of EU respondents indicating that they expect more than half of their new product launches to be ESG focused over the next two to three years.
A number of survey respondents, particularly the Asian respondents, also see white space for further innovation and expansion in the form of digital asset ETFs and funds that offer exposure to alternative assets, such as derivative strategies and commodity ETF products.
3. Distribution trends: Opening up new routes to market
ETF managers are seeking to attract investors from new markets and to find new ways to access investor segments in existing markets. Managers see the development of effective distribution channels as the number one driver for success. Digital distribution, including robo-advisors and online platforms, will help ETF managers to reach more investors as well as gathering key insights to help with marketing and product development.
Increased use of ETFs in model portfolios
- Across the regions, managers see model portfolios as a key source of demand for ETFs, with the US leading the way with over 82% of respondents expecting significant demand. These portfolios offer the benefits of customisation and diversification in line with the risk appetite and defined goals of investors. However, firms will need to keep abreast of the evolving regulatory
Increasing ETF demand from retail investors
- To realise the potential of the retail market, it will be important to continue to raise investor awareness of the benefits of ETFs compared with other investment products. Survey respondents see lack of investor education as one of the two biggest challenges they face, alongside meeting the demands of increased regulation.
- While ETF adoption by retail investors is mature in the US and Canada, this is not the case for Europe or Asia, but progress is being made. For example, within Europe, where ETFs have largely been focused on the institutional investor segment, Germany and Italy are two of the fastest growing markets for retail adoption largely driven by self-directed investors and ETF savings plans.
ETF expansion into new regions such as Africa, Latin America and the Middle East
- ETF managers in more mature markets expect to increasingly target untapped opportunities in Africa, Latin America and the Middle East. While each of these regions currently have relatively low ETF adoption amongst investors, there is significant potential for growth as the benefits of ETFs become better understood in these markets.
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