The European ETF market is set to more than double in size by the end of 2020 to reach $1.1trn, according to research from consultancy firm EY.
The firm released the results of its Global ETF Survey 2016, entitled “Integrated innovation: The key to sustainable growth”, for which it interviewed 70 leading ETF promoters, investors, market makers and service providers across the US, Europe and Asia-Pacific, covering some 86% of total ETF assets under management.
The consultancy expects global AUM in ETFs to reach $6trn by 2020, up from its current size of $3.4trn (as of August 2016), marking an average growth rate of 21.5% per annum.
The growth rate of European ETFs is set to remain slightly lower at 16% per year, but assets are expected to more than double from their current value of $533bn, to hit $1.1trn in four years’ time.
Respondents expect fixed income ETFs to be a key driver of growth, with assets in this area of the market already at an all-time high of over $600bn, and future inflows anticipated; although the report notes some industry participants are concerned about potential liquidity issues in fixed income ETFs.
Meanwhile, smart beta, including such offerings as dividend-weighted equity and multifactor funds, as well as sector ETFs and even Environmental, Social and Governance (ESG) themed products, are all growing in popularity, displaying the diverse nature of ETFs and their use by investors.
However, respondents noted active ETFs face headwinds amid concerns over their transparency, despite efforts by a “handful of promoters” to build track records in these products.
The demand for ETFs continues to come primarily from the institutional space, EY found. The report said: “Asset managers are the leading users of ETFs, making pension funds and insurers the industry’s most valuable targets…the gradual shift towards passive strategies is playing into the hands of ETFs.”
The respondents said stronger retail adoption of ETFs remains a key long-term ambition, but although there is evidence of interest in digital distribution, it is not seen as a “magic bullet”, while robo-advice, which uses predominantly ETFs and passive vehicles to maintain low costs, “remains in its infancy”.
Meanwhile, more than 80% of interviewees see Brexit as a threat to the UK and European market, and have set up working groups to identify the impact it could have on the industry. The key questions revolve around market access, the movement of labour and whether the UK will be able to continue distributing funds under the UCITS regime.
Respondents also noted concerns about Brexit potentially threatening the planned merger between the London Stock Exchange (LSE) and Deutsche Börse, as well as undermining LSE’s importance as a trading venue for ETFs – though there has been no evidence of this to date.
The report said: “Many promoters currently list their ETFs on the Irish Stock Exchange, allowing them to be traded on the LSE — a connection that is now called into question. In the event of a ‘hard Brexit’, ETF firms in Ireland and Luxembourg expect to enjoy an influx of talent and investment.”