The Global ETF Research 2017: reshaping around the investor report revealed that new entrants will join a market that is expected to reach $7.6trn globally by the end of 2020.
Based on interviews with 70 ETF market makers, service providers and promoters who collectively manage 85% of global ETF assets, 67% of respondents expect to see most asset managers offering ETFs in the next five years.
It also found over the next three years, 15% to 25% of ETF inflows will come from new investors, equating to a windfall of $250bn across the strategies.
Institutional investors will also continue to dominate ETF investing over the same period, according to 97% of interviewees.
The report highlighted private banks, investment funds and wealth managers as areas for growth, with the latter expected to look for core exposure through model portfolios.
Julie Kerr, EY Asia-Pacific wealth and asset management ETF leader, said: “The ETF industry needs to do more to help refine investor journeys for institutions by understanding and anticipating the long-term needs of different investment groups, addressing their concerns and developing the expertise needed to meet their unique challenges.”
Meanwhile, ETF fees have continued to fall, reaching 27 basis points (bps) on average in 2016, according to the research.
The report found 71% of interviewees expect fees to fall further as becoming a low-cost provider becomes essential to survival.
The research suggests that in the next 10 years, assets in passive funds will exceed those in active funds globally. ETFs are likely to benefit from this shift because of their low fees and daily liquidity in volatile markets.
Elsewhere, just under half (43%) of respondents feel there is not enough competition between index providers and expect more players to enter the space that donot rely on third-party index providers.
Lisa Kealy, EY EMEIA wealth and asset management ETF leader, said: “ETFs can no longer just be cheaper or more liquid than actively managed mutual funds.
“The industry will need to innovate around investors, refine investor journeys and reduce investor costs to remain competitive.”
Regulation strikes again
According to the report, the regulatory changes such as the Department of Labor Fiduciary Rule and Mifid II, should benefit ETFs because of the greater transparency they create.
A majority (61%) of people interviewed said they expect regulation to change the way ETFs are distributed.
However, as regulation continues to develop, so too is scrutiny of the industry’s systemic risk and taxation.
Matt Forstenhausler, EY Global and Americas wealth and asset management ETF leader said: “The industry needs to address market and regulatory threats and be willing to respond by developing new products and modifying existing products.
“A combination of local understanding and global insights can help investors understand the overall business environment and how this will impact investor journeys.”