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EY ETF study predicts more promoters entering market over next two years

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EY’s sixth ETF Research market study reveals that 92 per cent of the respondents interviewed predict more promoters will enter the market over the next two years. 

Almost two-thirds (65 per cent) believe asset management arms of large banks and/or active managers will enter the market. Slightly more than half (51 per cent) indicate small niche players and/or new startups will come to the sector. 

The survey reavelas that the ETF industry is confident that the double-digit growth will continue. More than half (56 per cent) expect the growth rate of the ETF industry to be between 11 per cent and 20 per cent over the next three to five years. Nearly a quarter (22 per cent) of respondents expect a growth rate of more than 20 per cent compared with just 10 per cent of respondents in 2017. More than half (57 per cent) of asset managers indicate the success ratio of new launches will improve in the future. This is up from 36 per cent in 2016 and 45 per cent in 2017.

Lisa Kealy, EY EMEIA Wealth & Asset Management ETF Leader, says: “The fundamentals are stacked in favour of the sector. While investors continue to flock to the ETF industry, it’s entered a new phase — one that is marked by continued growth. However, it’s also perceived as the right time to pursue process improvements, product innovations and new markets in an attempt to build differentiated market positions as more and new potential competitors are expected to flood the ETF market.’’

EY found that the Chinese market represents a substantial market for the sector in Europe – given its size and Asian investors’ demand. Ninety-seven per cent of respondents believe the sales opportunities in China for ETFs will be USD100 billion or more, once ETF Connect (a cross-border project that would give Chinese investors exposure to overseas assets through ETFs listed in Hong Kong) is operational within five years from now, compared with 66 per cent of respondents who believe it will reach USD100 billion or more within three years.

EY’s study reports that the ETF market, however, has some key issues to address to be able to fully harness this large opportunity. Only about one-third (30 per cent) are currently ready or on track to use ETF Connect once operational. In addition, 68 per cent feel the industry is not doing enough to support the ETF Connect project in terms of addressing operational issues.

Drivers for change in the ETF world’s operating models are regulatory requirements and emerging technologies – a view echoed by more than 66 per cent of respondents.

Kealy says: “Cost is now seen as a performance metric, so technology and operating model changes are planned to help create a competitive advantage. More than two-thirds (83 per cent) of asset managers have told us they are looking to use new technologies to reduce cost. So, there will be significant shift in the operating model.”

The report found that the industry will continue its focus on improving distribution. The way data is managed will, to a great extent, determine the success of distribution strategies, the report finds. The most popular approach to improving distribution cited by respondents is enhancing the product data on their website (67 per cent), followed by selling through online platforms (62 per cent).

Kealy says: “Given the prevailing uncertainty and pressures on margins, the optimism is proof of the sector’s resilience. The ETF industry, however, will need to recalibrate on many fronts to sustain momentum, translate technology benefits to increased client experience, adapt to regulatory changes and keep up with emerging opportunities. Being complacent will be very dangerous.”

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