Will 2017 usher in an ETF asset explosion?

Will 2017 usher in an ETF asset explosion?

Will 2017 usher in an ETF asset explosion? The first months of 2017 saw record inflows into ETFs as investors continue their exit from traditional active funds.

London-based consultancy firm ETFGI reported record inflows of US$197.3 billion into ETFs from January and March, according to the Financial Times.

At that rate—which could total US$800 billion for the year—2017 will far outstrip 2016, when the low-cost passive investment vehicles gathered US$390.4 billion in new assets, the highest amount ever recorded.

Citigroup strategist Robert Buckland called the surge in ETF growth a “seismic shift” inspired by investors’ “profound re-assessment” of the fees they were willing to pay for asset managers to run their money in the stock market.

The Orange County Employees Retirement System, a US$14-billion California-based pension fund in the US, terminated 16 actively managed mandates worth US$1.5 billion in total. In letting go of big names such as JP Morgan Asset Management, Franklin Templeton, and Pimco, the pension fund became the latest institutional investor to cut costs by cutting ties with active managers.

“Forty per cent profit margins are hard to defend in an industry where barriers to entry are low and there are low-cost disrupters on the prowl,” Buckland told the Times.

Citing figures from fund tracker Emerging Portfolio Fund Research (EPFR), the Times reports that actively managed equity funds have bled around $523 billion globally over the past 12 months, whereas passive equity funds have been infused with $434 billion over the same period.

Two of the most recent big winners in the shift to passives are Pennsylvania-based Vanguard and Blackrock, which saw their respective quarterly ETF inflows increase by 140% and 167% this year. Vanguard’s inflows amounted to US$42.8 billion, while BlackRock’s reached $65.4 billion.

The good times for ETFs mean hard times for asset managers. A recent forecast from Morgan Stanley predicted a decline of at least 3% in global revenues for fund managers over the next three years. The firm also believes that retail investor fees, which have historically been higher than those paid by institutions, will decline in response to regulators’ demands for transparent fund pricing.

With all the fee and revenue compression foreseen, active managers are scrambling to slash their own operating expenses. Mergers and acquisitions are on the rise: some recently announced asset management tie-ups include Standard Life and Aberdeen Asset Management, Amundi of France and Pioneer of Italy, and Henderson and Janus.

“Some asset managers may have no choice but to do deals to ensure their survival,” said New-York based Morgan Stanley analyst Michael Cyprys. “Our concern is that the [asset management] industry underestimates the size of changes required, as many banks did back in 2009.”


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