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ETF AUM to exceed USD5 trillion by 2020, says PwC

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Exchange traded funds (ETFs) will pay a prominent role in the growth of professionally managed financial investments, which are predicted to grow at 6% per annum to reach USD100 trillion by 2020, according to a new report by PwC.

‘ETF 2020: Preparing for a new horizon’ (“ETF 2020”), surveyed executives from 60 ETF sponsors, asset managers and service providers around the world and revealed more than three out of four executives expect ETF assets to double to reach at least USD5 trillion by 2020. 59% of ETF sponsors expect their business to become more profitable in 2015.

Institutional investors are widely expected to be the primary global growth driver with insurance companies, pension plans and hedge funds projected to be significant sources of demand for ETFs. According to PwC, growth of ETFs in the UK could also be driven by the likely increase in the importance and size of the UK consumer market as a result of recent pension changes announced in the 2014 UK Budget.

Hazell Hallam, UK ETF Leader at PwC, says: “From April this year people will have much more freedom over where they can invest their pension. The low operational costs and investment transparency offered by ETFs could make them an  attractive option to consumer investors.”

The regulatory environment will have a significant impact on the growth and innovation of ETFs over the next few years, with 91% of respondents indicating that regulation and taxes have an impact on ETF growth. PwC notes, however, that whilst new regulation could spark further growth if they permit further product innovation or lower distribution barriers, they could also dampen demand, particularly if new tax rules make ETFs less tax efficient.

Nigel Brashaw, global ETF leader, PwC, says: “Shifts in the regulatory environment will continue to produce opportunities that will favour firms with local market knowledge. The ability to transform ETFs into effective solutions that address the needs of specific investor segments will be a particularly important factor in competing successfully.” 

Europe and the US are expected to continue to dominate the ETF landscape although the highest rates of growth are expected to be found in the less mature markets of Asia, Latin America, the Middle East and Africa.

ETF 2020 highlights that service providers will need to continue to adapt their business model by adding resources, introducing more automation, globalising operations and upgrading technology. More streamlined operations to facilitate the cross-listing and settlement could make European ETFs much more attractive and cost effective.

New types of indexing (also referred to as “smart beta”) represent a hotbed of product development activity with 46% of firms surveyed identifying this as the most important area of innovation. Active ETFs (34%) and alternatives (29%) are also expected to be sources of significant ETF growth between now and 2020. 

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