PwC’s latest global report, entitled ‘ETF 2026: The next big leap’ predicts that global ETF assets under management are set to top USD20 trillion by 2026, with 60 per cent of European participants believing that ETF assets will reach at least USD3 trillion by 2026.
According to the report, PwC’s 8th annual global ETF survey, ETF assets reaching USD20 trillion by 2026 represents a 17 per cent compound annual growth rate, and a growth of more than double over the next five years. This follows a 22 per cent CAGR since 2005, combined with record inflows, new entrants, innovative products and distribution opportunities.
Speaking at the report launch, Marie Coady, PwC Global ETF Leader, said: “The near 22 per cent CAGR for ETFs since 2005 is rendered all the more impressive by the fact that it has been sustained during various periods of market volatility, as well as the pandemic related uncertainty. ETFs continue to stand up to each challenge and investors remain undeterred.
“The influx of new products and participants is changing the competitive dynamics within the ETF market. While there is increased competition, there are also opportunities from new products, markets and distribution channels. These include active ETF models, ESG and crypto ETFs, as well as online platforms and emerging markets in Asia-Pacific and Latin America.”
The report finds that the Asia-Pacific market has seen record growth in recent years and is emerging as what the firm calls a hotbed of innovation. Bullish Asia-Pacific survey participants expect ETF AuM to rise to at least USD2 trillion by 2026, the firm says, while Canada, the smallest ETF market covered in the survey, is one of the fastest growing with 42 per cent of survey participants expecting that Canadian ETF AUM will reach at least USD1 trillion by 2026.
The US continues to lead the way on ETF market size with more than 70 per cent of survey participants believing that US ETF AuM will at least double to reach USD13 trillion by 2026.
The ETF market is diversifying as the development and adoption of non-traditional products such as thematic and crypto ETFs gather pace, the report says. The sustainability agenda is driving significant growth in thematic ETFs which focus on long-term trends such as technological breakthroughs, demographic developments or measures to tackle climate change and resource scarcity.
Fixed income, global equity and domestic equity products remain popular and feature prominently across the different regions. However, regulatory barriers remain in some markets, which are inhibiting or slowing down the pace of product innovation.
The survey also reveals an increased appetite for crypto products. According to the survey, if there was regulatory approval for crypto ETFs, 46 per cent of European respondents confirmed that they would plan the launch of a crypto ETF within 18 months. This is 45 per cent, 38 per cent and 25 per cent respectively for Asia, Canada and the US.
Digital engagement and distribution have taken off, the report says. A large majority (84 per cent) of survey participants expect significant demand from online platforms over the next two to three years. Online platforms stand out as the primary source of expected ETF demand. The increasing digitisation of ETF distribution can lower costs, improve accessibility, and attract new investors. A combination of the pandemic and a new generation of investors coming into the ETF market has triggered the lift-off for robo-advice and digital engagement, PwC says.
The report highlights that ESG is moving mainstream with managers facing a whole new set of investor, regulatory and wider societal demands. Europe is out in front in terms of growth plans with the US looking to catch up as investor expectations on ESG increase.
Globally, 46 per cent of survey participants expect more than half of their product launches in the coming year will be ESG-focused. Over 80 per cent European survey participants expect more than half of their product launches in the coming year to be ESG-focused. Canada leads the following pack, with 43 per cent of survey participants expecting more than half of their product launches to be ESG-focused over the coming year. Asia is next at 38 per cent, with the US lagging some way behind at 28 per cent.
However, PwC warns that many investors are beginning to scrutinise ESG performance as closely as financial returns.
“The immediate challenge is regulatory, including a plethora of ESG designations and reporting requirements in different markets which are rarely consistent. The absence of an agreed, consistent and mandatory disclosure framework akin to financial reporting standards has created challenging uncertainty. Issuers also face challenges regarding the ability to secure reliable, consistent data, along with uncertainties with regard to certain aspects of ESG rating/scoring,” the report says.
Marie Coady concluded: “ETFs not only stood up to the uncertainties brought about by COVID-19, they picked up the pace of growth in 2020 and 2021. However, the increased pace of growth and innovation brings with it increased risks and regulatory scrutiny.
“The ETF market is diversifying as the development and adoption of non-traditional products such as ESG, thematic and crypto ETFs gather pace. The influx of funds worldwide together with accelerating innovation is opening up more investment opportunities and customer choice. The need to stand out in an increasingly crowded and competitive arena will spur further development. However, regulatory barriers remain in some markets, which are inhibiting or slowing down the pace of product innovation compared to other markets. The winners will be those who adapt at pace, seizing the opportunities that ESG and this new post pandemic environment will bring.”