Global ETF assets under management could grow from approximately $1.5 trillion today to between $3.1 trillion and $4.7 trillion by the end of 2015, according to a McKinsey & Company report.
The report also said that if active ETFs followed the same growth pattern as passive ETF products, they would constitute approximately 10 percent of all actively-managed U.S. long-term mutual fund assets within a decade and exceed $1 trillion in assets under management.
The report concludes that: "All asset management executives should keep a close watch as the ETF market evolves so they are well-prepared for what promises to be an exciting second act."
Financial News is among the media outlets that covered the report's findings.
GLOBAL ETF ASSETS UNDER MANAGEMENT COULD GROW
TO $4.7 TRILLION IN 2015, ACCORDING TO McKINSEY REPORT
New Products and Distribution Channels, Rapid Global Expansion and New Business Models Will Characterize Next Phase of Growth
New York, N.Y.; August 16, 2011 - Global ETF assets under management could grow from approximately $1.5 trillion today to between $3.1 trillion and $4.7 trillion by the end of 2015, according to a new report released today by McKinsey & Company. “Not since the advent of index funds, hedge funds, or possibly the mutual fund, itself, has the asset management industry witnessed an innovation as profound as exchange-traded funds (EFTs),” says the report, entitled The Second Act Begins for ETFs: A Disruptive Investment Vehicle Vies for Center Stage in Asset Management.
Over the past decade, no other significant segment of the U.S. asset management industry has grown as quickly and consistently as ETFs, according to McKinsey’s analysis. From 2000 to 2010, exchange-traded product (ETP) assets under management grew over 30% annually, compared to 5% to 6% for U.S. mutual funds.
While producing impressive growth, ETFs have also disrupted the asset management industry across multiple dimensions, says McKinsey, including:
· Expanding investor access by “democratizing access to an array of asset classes and strategies.”
· Allowing advisors to monetize advice, “replacing the stock-picking advisor of the past with the ‘ETF asset allocator’ of today.”
· Providing a superior product design, that “offers a stronger overall value proposition than traditional passive mutual funds.”
Today, the ETF competitive landscape is changing dramatically, according to McKinsey. “Until recently, ETF manufacturers enjoyed the luxury of relatively smooth sailing,” says the report. “ETFs are now a hotbed of competition with an expanding and aggressive array of competitors.”
In addition to more intense competition, the ETF market is now characterized by product proliferation, with a rising number of failed launches suggesting the passive ETF market is getting closer to saturation; intensifying price competition; regulatory uncertainty; and shrinking seed funding, making it more difficult for some ETF sponsors to find market maker capital for new products.
While competition in the ETF market is intensifying, the outlook for global ETF growth remains strong, according to McKinsey, supported in part by:
· Renewed focus on investment cost: A slow and steady long-term trend toward passive strategies has taken root in the U.S., with ETFs the main beneficiary.
· Fee-based advisory growth: Aligning clients’ and advisors’ focus on low-cost products such as ETFs.
· Regulatory emphasis on transparency: ETFs offer comparatively simple pricing structures and should have an advantage over traditional funds in an era of greater transparency.
· Rising investor awareness: Awareness and adoption of ETFs will continue to increase as more well-recognized fund names enter the market with both passive and active ETF products.
The McKinsey report says the next phase of growth in ETFs will be marked by four developments that will change the industry landscape significantly:
· An increasingly competitive market for passive investments: Leaders in the passive ETF business today will face growing competition from other groups, such as large conventional asset managers with strong brands, players with proprietary distribution platforms, and niche-focused, innovative boutique managers.
· Growth in active ETFs: While active ETFs are a nascent product category today, they have the potential to initiate a new growth curve for the asset management industry as a whole. If active ETFs followed the same growth pattern as passive ETF products, they would constitute approximately 10% of all actively-managed U.S. long-term mutual fund assets within a decade and exceed $1 trillion in assets under management. “Industry trends are increasingly favorable for growth in active ETFs,” says McKinsey.
· Globalization of the marketplace: Large U.S. sponsors and even some mid-sized players will increasingly look to less mature overseas markets, expanding into Asia and Europe, and in turn, they can expect to see European manufacturers entering the U.S. over the next few years.
· New competitive models: McKinsey expects to see competitors in the ETF market gravitate to one of several business models, including at-scale mainstream index players, “store-brand” players, category specialists or alpha seekers.
“All asset management executives should keep a close watch as the ETF market evolves so they are well-prepared for what promises to be an exciting second act,” the McKinsey report concludes.