Why ETFs are set to dominate fund assets

Report projects products will capture a quarter of fund industry by market capitalization by 2027

Why ETFs are set to dominate fund assets

Within five years, exchange-traded funds (ETFs), driven by the increase in active ETFs, will represent approximately a quarter of all fund assets.

That’s according to a forecast by Oliver Wyman, which expects their market capitalization share will increase from 17% now to 24% by 2027. When compared to the rise in assets under management for all funds, the ETF market grew at a rate of 16% annually between 2016 and 2022.

ETF adoption is especially strong in the US because of the tax benefits, as well as their greater visibility and accessibility. By 2022, 13% of all fund launches in Europe would have taken place, up from 5% in 2016. In the US, the launch of an ETF has surpassed the debut of a mutual fund, while in Europe, 13% of all fund launches took place in 2022, up from 5% in 2016.

In fact, among DIY investors at AJ Bell, a UK-based investment platform, ETFs accounted for five of the top ten investments in 2022. Although active ETFs are gaining popularity among investors, ETFs are often thought of as passive funds, according to the report.

“Not only are investors looking for differentiated strategies to beat the market, but they are also increasingly looking for products that meet their needs for environmental and socially responsible investing, as well as allow them to connect with contemporary themes,” the report said. “This is driving significant growth in a theme-based and innovation-focused part of the ETF market.”

The amount of active ETF releases increased by 92% in Europe and 30% in the US between 2016 and 2022. To decrease exposure to specific industries, Vanguard last summer launched two new ETFs that were centred on the FTSE Developed Europe and North America All Cap indices. Those index ETFs were labelled as “ESG-focused.

While smaller fund providers are benefiting from rise in cutting-edge ETFs, the high cost of infrastructure, steep risks of failure, and challenges hiring people with expertise in the area present obstacles for such companies.

“These challenges have given rise to a new trend in the ETF market — the emergence of white-label ETF providers,” the report said.

Fund managers who perform tasks including portfolio management, custody, fund administration, marketing, and distribution can outsource those functions to white-label ETF providers. According to the report, this generates economies of scale and lowers the financial risk and operational difficulties for smaller suppliers.