Most asset managers expected to have ETF offerings in next five years

But aside from low fees and low ownership costs, other investor concerns have to be addressed

Most asset managers expected to have ETF offerings in next five years
Due largely to the investment industry’s focus on costs, the ETF format is expected to become even more popular among asset managers. But ETFs need to go beyond that pricing proposition if they are to cement their place in investors’ hearts and portfolios.

That’s according to a new report from EY titled Global ETF Research 2017: reshaping around the investor. Among survey respondents — which include ETF market makers, service providers, and promoters, who collectively manage 85% of global ETF assets — 67% believe most managers will have an ETF offering in the next five years.

The report also found a continuing decline in ETF fees, which last year settled to an average of 27 basis points. Seventy-one per cent of people interviewed said they expect fees to go lower as cost continues to be a determinant of survival; globally, assets in passive funds are projected to exceed those in active funds in 10 years, with ETFs benefitting disproportionately.

Operating models for ETF investment are also being future-proofed through reductions in all costs of ownership. Weighing in on the influence of index providers, 43% felt there wasn’t enough competition and expect more players, including self-indexers, to enter the space. Other ways to reduce costs of ownership cited were stock lending programs, digital distribution, and best execution.

But the report asserted that “zero-fee” ETFs will not become the norm. Instead of racing to the bottom, ETF providers will have to stay ahead of investors’ needs, consider macro trends in regulation and technology, and focus on investor education. They’ll also have to embark on many different forms of product development, including the creation of new thematic ETFs, enhancing access to debt, and investing in alternatives.

“ETFs can no longer just be cheaper or more liquid than actively managed mutual funds,” said Lisa Kealy, EY EMEIA Wealth & Asset Management ETF Leader. “The industry will need to innovate around investors, refine investor journeys and reduce investor costs to remain competitive.”

Based on findings from the research, new investors will account for 15% to 25% of ETF inflows over the next three years. ETFs are typically used by investors initially looking for selected exposures they cannot access elsewhere, but then become more comfortable using them as the building blocks of portfolio construction.

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