A comprehensive paper published by PwC last month entitled ‘ETFs in 2020’ paints a very detailed picture of how the Exchange Traded Fund business is likely to evolve globally over the next five years. According to the analysis, the market will double to $5tn by 2020, and its impact has the potential will be felt much more widely within our industry than previously imagined.
A few takeaways from the report we found particularly interesting:
- Despite fragile economic growth in developed markets, the global AM industry is predicted to grow at a healthy pace. Having doubled over the past decade (to $70tr), PwC predicts professionally managed financial investments will grow by 6% per year , due to both asset inflows and value appreciation. The US & Europe will dominate asset flows in absolute terms, but the highest rates of growth are likely to come from developing markets. Passive funds currently account for around 35 per cent of all mutual fund assets in the US.
- New types of indexing (also referred to as ‘smart beta’) are perhaps the most important area of innovation within theproduct class. As they continue to evolve, a growing number of investors are likely to opt for index weightings based on factors other than market capitalisation, which by itself can lead to overly concentrated exposure to certain markets, sectors, or securities. The size and scope of actively managed ETFs are also set to grow (there are currently 55 actively managed ETFs listed in the US with AUM of $9.6 billion).
- The regulatory environment in the US and Europe is expected to have a significant impact on the evolution of ETFs. New regulations could spark further growth if they permit further product innovation or lower distribution barriers, but they could also dampen demand, particularly if new tax rules make ETFs less attractive or convenient. For instance, MiFID II could be a game changer in Europe, where the adoption of ETFs by retail investors significantly lags behind the US.
- Firms offering ETF products to investors will need to consider rapid changes to the way asset management services are created and consumed, with the most dramatic changes enabled by technology.
If the predictions do come true, they will no doubt have an impact on a future shareholder register structure and consequently on corporate IR strategy.
A few questions for companies to consider:
- Do I monitor my shareholder register on a fund level, for the activity of the largest three ETF fund providers: Vanguard, Blackrock (iShares), and State Street (SPDRs)?
- Am I familiar with which are the largest and most active ETFs in my asset class? I am aware of key trends and drivers of their growth?
- Do I know which indices is my security a constituent of?
- Am I staying on top of developments in the active ETF space?
Top 10 Emerging Market ETFs
|Name of Fund||Assets||Average Volume||2015 Performance|
|Vanguard FTSE Emerging Markets ETF||$46,331,830||13,908,497||+4.40%|
|iShares MSCI Emerging Markets Index Fund||$31,702,630||55,250,906||+3.51%|
|iShares Core MSCI Emerging Markets ETF||$6,254,856||2,344,426||+3.91%|
|iShares MSCI India ETF||$2,822,917||1,059,985||+10.02%|
|WisdomTree India Earnings Fund||$2,308,956||4,828,908||+8.34%|
|WisdomTree Emerging Markets High-Yielding Equity Fund||$2,256,093||914,679||+5.69%|
|iShares MSCI Emerging Markets Minimum Volatility Index Fund||$2,093,439||446,303||+4.36%|
|Market Vectors Russia ETF||$1,610,733||20,284,920||+23.38%|
|WisdomTree Emerging Markets SmallCap Dividend Fund||$1,470,268||273,755||+3.34%|
|Schwab Emerging Markets Equity ETF||$1,182,924||536,871||+4.23%|
Sources: PwC, ETF Database. To download a copy of the PwC paper visit: www.pwc.com/etf2020