ETFs’ Strong Growth Invites More Scrutiny: EY

By | October 27, 2015

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With ETF assets continuing to perform strongly against other investment vehicles, the industry’s increasing size is receiving an ever-growing level of external attention, notes EY. EY published a report titled: ” ETFs: a positive force for disruption ” after interviewing nearly 80 leading promoters, investors, market makers and service providers across the U.S., Europe and Asia-Pacific. ETFs to grow 18% every year for next 3-5 years Beginning with a confident tone, the EY report points out that the ETF industry’s growth over the last two decades represents one of the financial sector ‘s greatest recent success stories. According to EY’s latest global survey of the ETF industry, a weighted average of global responses suggests that respondents anticipate their businesses to grow by around 18% every year for the next three to five years. The report highlights that over 90% of those surveyed anticipate the industry as a whole to enjoy positive net new business over the next 18 months, with 34% predicting net inflows of over 20%: The survey notes innovations are now considered as the most significant source of differentiation between promoters, with product strategies also considered as increasingly important: Focusing on the defining themes of U.S., European and Asian markets, the EY survey points out that while the industry as a whole is shaped by global trends, regional differences in regulation, demand and infrastructure continue to shape different ETF markets in different ways. Highlighting the rapid growth in Asia-Pacific, the report notes the majority of Asian respondents anticipate their own businesses to grow by 25% to 30% per annum over the next three to five years. Asian markets, including Japan and Australia, are identified as the most attractive targets for geographic expansion by both global and local respondents: ETFs have the ability to turn investment problems into solutions Innovation has always been integral to the ETF story, with 83% of respondents anticipate to increase spending on new products over the next 18 months. Focusing on “smart beta”, the report, however, wonders whether it is ETF’s brightest hope for the future, or a Trojan horse that threatens to lead the industry astray. The report notes currency hedged ETFs have been the industry’s success story of 2015, accounting for the world’s two most successful funds during the first eight months of the year. The EY report notes investor demand is expected to drive continued growth in hedged ETFs, typically alongside matching unhedged share classes: The EY report also examined three hot topics viz.: structural innovation, digital distribution and the search for efficiency. It also highlights that the development of ETF share classes of mutual funds – ETF sub-funds under a mutual fund umbrella – is seen as the second most promising structural innovation after currency-hedged funds: Focusing on digital distribution, the report points out that dedicated sales teams remain a vital area of focus. Of note, the ETF industry is also undergoing a huge surge of interest in online distribution: Delving deeper into the third hot topic viz.: search for efficiency, the EY survey reveals that stronger links with authorized participants and market makers are seen as the greatest priority for technology improvement, with better client and investor dashboards and reporting also identified as key priorities: Concluding with a warning note, the EY survey cautions that in its rush to deliver growth over the next two to three years, the ETF industry needs to make sure it doesn’t do anything rash to harm its potential expansion over the next 5, 10 or 20 years. Disclosure: None Scalper1 News

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