ETFs to be “dominant fund structure” by 2030?

May 24, 2016

But Asia's retail market for ETFs requires better education for investors, more regulatory backing and advances in technology if it is to gain a bigger share of the pie, say industry participants.

ETFs to be “dominant fund structure” by 2030?

Exchange-traded funds will be the dominant fund structure globally by 2030, when the asset management industry is expected to be worth $110 trillion, argued Deborah Fuhr, managing partner of research house ETFGI at an AsianInvestor forum yesterday.

By what measure was not clear, because while they will grow as a share of the pie, ETF assets will remain a relatively small percentage of the global funds industry. Fuhr predicted that exchange-traded product AUM would reach $7 trillion in 2020, up from $3.32 trillion as of end-April. The global asset management industry now stands at $75 trillion.

Other speakers at AsianInvestor’s ETF Summit in Hong Kong agreed on the ETF sector’s huge potential, with panelists pointing to developments that could help it achieve such growth.

Asia, which represents only 4% of global ETF assets, remains largely an institutional market for ETFs, with factor-based strategies the most popular products, said Fuhr.

Indeed, ETFs are quickly becoming the preferred means of beta replication for institutional asset owners, said Matthew Arnold, head of ETF strategy and research for Asia at State Street Global Advisors. “Especially once they understand how they work and how easy they are to use, for example, compared to futures-based structures.”

Yet in 15 years’ time retail investors, too, should be using ETFs much more, with the benefit of greater education and understanding of their benefits, said panelists.

Consultant and ETF blogger Reuben Sushman, of 375 Park Associates, suggested that once electronic platforms and robo-advice become fully effective as distribution channels, the ETF market would be transformed.

Moreover, leveraged and inverse ETFs are seen as key to the development of a broader array of investment options in Asia. But the regulatory insistence that these products are categorised differently from plain-vanilla ETFs could prevent them being better understood by retail investors, said Fuhr.

In the short term, the retail market remains challenged by the distribution limitations of a product that doesn’t pay commission to advisers, noted panelists. However, they felt the evolution of discretionary accounts and wrap platforms would result in more use of ETFs as private clients became more fee-conscious.

A further boost to the market could come from fund houses and regulators playing more of a role in educating investors and creating an environment for pension saving that integrates ETFs fully into the product mix, said Blair Pickerell, former Asia chairman of Nikko Asset Management.

Only then, he noted, would the average investor get to realise the genuine benefits of ETFs in term of cheap and easy access to a globally balanced, long-term investment portfolio.

Fuhr made a similar point, arguing that regulators could play a role by insisting on more fee transparency and including ETFs as an integral part of the pensions system.

Sanjay Sachdev, chairman of south Asian ETF investment manager Zyfin, suggested fee compression in the hedge fund space was an indication of what would be likely to happen to mainstream asset management fees.