Exchange Traded Funds (ETFs) expected to grow to $5 trillion

The proliferation of ETF funds in the past ten years has been significant and asset managers should expect that trend to continue. As of the fourth quarter 2013, approximately $2.2 trillion was invested in almost 5,000 ETFs. The investment in ETFs more than doubled during the financial crisis. Industry observers suggest that expected growth could lead to over $5 trillion in assets under management (AUM) in the next five years.

ETFs have flooded the market and brought new investors and competitors as new asset managers are emerging. These funds continue to evolve particularly as asset managers do not want to be left behind in capitalizing on investor interest and the natural evolution of product design.

The funds are used by individuals, intermediaries, and institutional investors and offer several advantages allowing for their growth including:

  • Liquidity
  • Low cost structure
  • Tax efficiency

The liquidity of such investments and low cost nature of the investments due to indexing of marketable securities are paramount reasons for this growth in a time when investors are scrutinizing costs of their investments, overall portfolio returns, and ability to realize cash in times of distress. 

Why market appetite is increasing

The trend towards ETFs may continue to expand due to a number of factors and asset managers should consider if this fits their investment expertise and offerings. The low cost structure, liquidity, and tax efficiency have created identifiable benefits that appeal to investors. Continued changes to design and use of ETFs could create an increased market appetite for investors including the following:

  • Movement to  active investment strategies
  • Increase use of ETFs by institutional investors
  • Increase in specialty / alternative ETFs (bank loans, convertibles etc.)

While the market for these funds may appear saturated with product development, changes in investor patterns, and access to new investors, there may continue to be opportunities within the ETF marketplace. More than half of the investments in ETFs are related to funds domiciled in the US. With a highly competitive financial services sector and significant cash flow expected within these funds, asset managers should carefully evaluate if EFTs should be part of their growth strategy.