Passive assets are on track to surpass active funds in 10 years, according to a new EY report.
ETFs will benefit disproportionately from the shift because of their low fees and intraday liquidity in volatile markets, EY says.
The Global ETF Research 2017: reshaping around the investor report found 67 per cent of the industry expects most asset managers to have an ETF offering in the next five years. Smart beta, alternatives and fixed income will be areas for growth.
The ETF market is currently dominated by US giants, such as Blackrock and Vanguard, with Invesco recently making several acquisitions in the space.
The UK market is much less developed, but index heavyweight LGIM announced last week it is buying ETF platform Canvas.
EY predicts ETFs will account for $7.6trn assets under management by 2020 with up to 25 per cent of inflows coming from new investors, who typically turn to ETFs for exposure they can’t get elsewhere.
The report notes average fees currently sit at 27bps with stock lending, digital distribution and best execution areas that could bring down costs. Forty-three percent of respondents feel there is insufficient competition between index providers and expect more players to enter the space, including more self-indexing.
While institutional money will dominate assets held, wealth managers, private banks and investment funds are listed as promising areas for growth. Pension funds are expected to use ETFs for liquidity management while wealth managers are expected to look for core exposure through model portfolios.
While Mifid II is expected to benefit ETFs due to greater transparency, there is potential for greater regulatory scrutiny of the industry’s systemic risk and taxation.