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Tuesday, June 04, 2013

Global ETP Market Passes $2T

Reported by Tommy Fernandez

Global ETPs are on a roll.

According to research recently released by Cerulli Associates, the the global exchange-traded product industry surpassed $2 trillion in total AUM.

Further the research firm's June issue of The Cerulli Edge -- Global Edition indicates that the industry saw record net new flows of $83 billion for April year-to-date.

The report notes that "ETP sponsors are pulling out all the stops and delivering products that tap into every conceivable strategy and need."

In the report, Cerulli analysts say that in Europe, the prevailing market view is that "the exchange-traded fund (ETF) market is expanding at such a rate that ETF providers do not necessarily have to steal marketshare from each other to get ahead. They can focus on niche strategies or encroach on active managers' territory."

The report also notes that active ETF providers in the United States are hoping to leverage their expertise and reputation to grab marketshare in Europe. However, providers face transparency and regulatory issues as well as competition from low-cost mutual funds, according to the report.

"In a recent Cerulli survey of U.S. ETF sponsors, most do not expect a wave of active ETF growth in the next two years," statedYoon Ng, an associate director at Cerulli. "But that is not stopping them from developing active ETF portfolios. More than half (57%) of sponsors interviewed plan to develop active fixed-income ETFs and 36% have plans for active equity ETFs."    

The 26-page report included a number of insights into the global ETP and ETF market. Here are a few of the findings as they relate to the U.S. market:

According to a Cerulli proprietary survey cited within the report, 38% of respondents expect institutions to be major users of ETFs in 2013. In fact, the report noted, all ETF sponsors rated institutional use as at least a moderate driver of ETF growth.

All ETF sponsors Cerulli surveyed reported that liquidity is a very important attribute for institutional investors. The ability of institutions, especially tactical traders such as hedge funds, to quickly and easily get in and out of their positions is driving interest from this audience.

Through an analysis of 13-F filings (reports filed by institutional investors), Cerulli found that institutions use ETFs for international exposure, especially emerging markets, and for commodity exposure. Emerging markets and tactical commodity trading are both areas of the market in which investing directly in the underlying assets can be more costly than using the ETF.

Although there are exceptions, institutional use is concentrated among the largest ETFs, which means mainly the big-three ETF managers.

According to the report, the more well-known ETF strategists include Windhaven Investment Management (owned by Charles Schwab), RiverFront Investment Group, and F-Squared Investments, Inc.

The report notes that ETF strategists typically operate within subadvisory or dual-contract separate account programs or model-driven separate accounts in unified managed account (UMA) programs, though some firms do offer mutual fund ver- sions of their strategies.

An important Morningstar figure cited by the Cerulli report was this: as of 2012, US$63 billion was invested in the 530 strategies that the firm tracks; these as- sets represent a 60 percent growth rate for the year.  

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