ETF providers expect 18% growth p.a.

Despite volatile markets, exchange traded funds are continuing to expand. EY looks at the industry environment for ETF providers, who are confident that their assets will grow and profitability will increase.

Providers of exchange traded funds (ETFs) are confident that their industry’s rise continues. In a survey pursued by Ernst & Young, they expect their business to grow by 18 percent on average over the next three to five years, as they continue to gain market share from traditional active asset managers and passive mutual funds. More than 90 percent expect positive net new business over the next 18 months with 34 percent of responded expecting net inflows higher than 20 percent.

“The ETF industry has an ability to turn investment problems into investment opportunities, so seeing this level of confidence in spite of current economic headlines is not surprising. We continue to see great energy and promise for the future. However, as it seeks to deliver growth in the short term, the ETF industry needs to keep its long-term legacy in mind and ensure it does not harm potential growth expansion over the next 5, 10 or 20 years,” says Lisa Kealy, EY EMEIA ETF Leader, in a press release.

To achieve this strong growth, ETF providers are not just relying on existing products but will increase their spending on product development. 83 percent expect to increase new product spending. This innovation will affect beta and currency hedged ETFs as well as ETFs on single emerging markets, infrastructure and socially responsible investing.

As the industry is highly attractive due to the strong growth, 89 percent of respondents expect more ETF promoters to enter the market within the next two years. Despite more competition, 79 percent expect management fees to remain unchanged. “Many providers see the expansion of their investment capabilities instead of the reduction of costs as the best way to relieve margin pressure. This trend shows a highly significant industry-wide shift from a vision of growth focused on price competition and low costs to one driven by a more diversified and innovative product range,” Kealy adds

The survey “Global ETF Survey 2015 ETFs: a positive force for disruption” was pursued by Ernst & Young with nearly 80 leading promoters, investors, market makers and service providers across the US, Europe and Asia between July and September 2015. The respondents collectively represent issuers managing more than 85% of global ETF assets.