The Exchange Traded Funds (ETF) industry could surpass the hedge fund industry in Assets Under Management (AUM) in the next 12-18 months according to EY’s Global ETF Survey.
While growth rates will be highest in Asia and lowest in the more mature US market, the growth drivers will be the same across all markets – foreign currency share classes, fund of fund ETFs, new emerging market funds and commodity ETFs.
Achieving scale remains the leading barrier to entry and is a greater challenge in 2014 than it has been in previous years.
In addition, lack of liquidity is the most frequent reason that fund launches fail. More than 90% of those surveyed view $50million as the minimum size for an ETF to be viable. More than a third of respondents said $100million was the minimum size.
Lisa Kealy, EY’s ETF Leader in Europe, the Middle East, India and Africa, says: “Growth will come from innovation, from more wide-spread users of, and uses for, ETFs as they take market share from active and other passive competitors.
But this year there is a growing awareness amongst promoters that this innovation leaves them open to increased risk – that “someone else’s mistake” could undermine the industry in the eyes of regulators and consumers and damage the whole industry’s growth prospects.”
The EY Global ETF Survey interviewed more than 60 promoters, market makers, investors and service providers over 13 markets, including promoters representing 87 percent of the industry’s global assets.
The US market is relatively mature, with 70 percent of the global ETF assets, but it is still set to grow at 15 percent annually. Growth rates in Europe will average 15-20 percent while those in Asia Pacific will be amongst the highest in the world at 20-30 percent per annum.
Lisa says: “The European market is comparatively sophisticated, but geographically fragmented and carries a heavy regulatory burden. The rapid development of Asian ETF markets suggests that they could leapfrog ahead of Europe in the future.”
Matt Forstenhauseler, EY’s Global Asset Management ETF Leader, says: “The US market is still growing at 15percent, which is an incredible rate for a more mature market.
A significant proportion of US inflows represent inward investment from other regions, including Asia and Europe, suggesting that the domestic market may have reached maturity.”
