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TETF five year forecast predicts continued ETF asset growth

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The TETF.Index that lies behind the ETF that mirrors the ETF industry has published a white paper entitled: The ETF Industry- The Next Five Years.

Contributors include Linda Zhang (pictured), founder of Purview Investments, and Professor Emeritus, Burton Malkiel and views across the board see continued asset growth in ETFs, while growing institutional use seems to be one of the main drivers.

Zhang believes that ETF growth is at a tipping point where non-US fund growth will soar, while Malkiel predicts that the ETF industry will double over the next five years.

Malkiel writes that drivers include the fact that the competition in fees is driving the costs down. 

“People increasingly believe that one of the surest ways to get better performance is to pay lower fees. Sometimes I’d like to say that any of us who write about financial markets needs to be very modest about what we know and don’t know. However, one of the few things that I’m absolutely sure of is this: the lower the fees that I pay to the purveyor of the investment product, the more there’s going to be for me.”

Malkiel also believes that another growth driver is going to be much more smart beta, and it will be multifactor smart beta. 

“One thing we know about single factor smart beta is that sometimes these factors present a very large and excess return, and other times they underperform.

“With multifactor smart beta prime factors, we know that they tend to either have very low correlation with one another or, in some cases, even have negative correlations. Simply, there are very good portfolio effects from multifactor ETFs and I think there will be more of that in the future.”

Zhang believes she is the most conservative in the group.

She writes: “I thought it was great to predict that the global ETF would double to over USD10 trillion. Right now, it is a little over $5 trillion. I’ve heard some predictions that it will triple and that’s possible. I do want to add a note of caution. We just have experienced nine years of a bull market. Assuming there’s no major correction, our projections will be right on target.

“One of the biggest drivers will be growth due to the popularity of model portfolios at large brokerage firms. We have seen the success of Vanguard, Charles Schwab, and others that are offering these models at a fee or very low fee.

“Another potential eventual driver will be institutions. Other owners have fiduciary duties to answer the question of why they’re paying much higher fee for active mutual fund managers if they repeatedly prove their net performance net fee. It doesn’t match up with what ETFs can deliver. This has been a frustratingly slow area of change with the pension sponsors, but there’s more pressure for that to change.

“Lastly, another growth area will continue to be at the expense of mutual funds. We’ll continue to see a switch out of mutual funds into ETFs.”

Kris Monaco, co-founder of Level ETF Ventures, agrees that the industry will see current amounts double in five years, especially as this year has seen USD1 trillion in inflows. Monaco forecasts assets of USD12 trillion in five years, driven by increased participation and, like Zhang, sees growing adoption among larger  institutional users. 

He writes: “This is a big one because they’re using ETFs in different ways. Theuse of ETFs as an alternative to direct ownership of an asset class has become clear in the past few years, especially with fixed income ETFs. Using ETFs in lieu of other financial derivatives has driven a lot of volume as well.”

Monaco also sees increased penetration of ETFs in retirement accounts, specifically the US’s 401(k)s, as another growth driver. 

“Although that’s mostly local to the US, that factor alone is a several trillion-dollar market and changes in the way money is managed. There was a lot of hype over digital asset management or robo-advisors, and a lot of that hype has been deflated. However, we’re now starting to build a strong base, and younger investors will likely manage their money that way.”

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