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Beverly Chandler

‘Do no harm’ warns EY’s ETF survey


EY’s latest ETF survey, its fourth and third that is fully global, finds that, despite volatile financial markets, the global ETF industry continued to expand during 2015. EY finds that at the end of September 2015, the ETF and exchange traded products (ETP) industry managed 5,978 products, representing total assets of USD2.8 trillion.

 Despite the volatility of markets at the time of their survey, EY found that interviewees remained confident about their prospects for growth. The firm writes that a weighted average of global responses suggests that respondents expect their businesses to grow by around 18 per cent every year for the next three to five years.
EY describes the ETF industry as one that: “Has a rare ability to turn investment problems into investment solutions. The sector has also weathered a number of crises over the past two decades and, throughout that time, investors have continued to support ETFs by voting with their feet.”
However, the firm warns that the industry’s increasing size is not without its drawbacks. “Chief among these is an ever-growing level of external attention. While most respondents welcome closer scrutiny, there are concerns about regulatory misunderstandings and the associated potential for reputational risks. And, while the ETF industry mainly continues to get a good press, some interviewees admit to frustration at the way that market volatility is sometimes labeled as ‘an ETF problem.’”
However, from another perspective, greater size brings greater influence, with many active managers with no history of issuing ETFs being forced to respond to developments such as smart beta, with many choosing to launch ETFs or partner with existing providers, the report says. “There could be no clearer sign of the growing impact that the ETF industry is having on the wider regulated funds sector and the asset management industry as a whole.”
Globally, EY sees huge energy, exceptional creativity and immense promise for the future. “The industry has a strong track record of adapting to different markets, and
we expect that to continue as it expands into new regions, such as Latin America and the Middle East” the firm writes. “We are also struck by ETF providers’ desire to work with investors and tailor products to their needs — an attitude that is not always a feature of every corner of the asset management sector.”
In conclusion, the firm issues a warning to the industry that it needs to ensure it does nothing to harm its potential expansion over the next five to ten years or 20 years. “As it grows in size and influence, the ETF industry needs to ensure that it continues to act as a positive force for disruption” the firm writes.
“At the same time, we would like to remind the industry of a few eternal truths. One is that innovation and creativity always bring controversy and, inevitably, some risks. Another is that ETFs depend on a strong ecosystem and close cooperation between providers, authorized participants, market makers and service providers.”

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