For those who have been involved with ETFs in Europe since their inception, it’s hard to believe that January 22, 2018 will mark the 25th anniversary of the listing of the first ETF in the United States. The first ETF was listed in Canada nearly three years earlier on March 9, 1990.
Although ETFs are no longer a new product, their growth rate continues to be impressive. And we can see that a number of tailwinds are likely to continue to fuel the growth in assets in ETFs/ETPs listed around the world.
ETF assets hit new records worldwide
We are seeing continuing net inflows, the increased adoption of ETFs across the full spectrum of investors around the world, and the advent of new issuers and new types of products. Other catalysts for growth in the ETF industry include regulatory changes, the relative performance and cost of alternative products, and a growing acceptance that ETFs are a solution that can be used by most institutions, financial advisers and retail investors.
In recent years the growth rate in ETFs has accelerated. Year-to-date, through end of November 2017, ETFs and ETPs listed globally saw record net inflows of US$600 Bn; 53.6% more than net inflows for the whole of 2016. The majority of these flows can be attributed to the top 20 ETFs by net new assets, which collectively gathered $215.6 Bn during 2017.
Similarly, the top 10 ETPs by net new assets collectively gathered $10.4 Bn year-to-date during 2017.
In the four years to November 2017 the assets in ETFs/ETPs listed globally have doubled to reach $4,742 trillion; and in 2017 the asset total increased by 33.6% in the first eleven months of the year, the greatest annual increase since 2009 when markets recovered following the 2008 financial crisis. We are on target to meet ETFGI’s 2015 forecast that global ETF/ETP assets would reach $ 8.9 trillion in 2020.
Year-to-date, through end of November 2017, ETFs and ETPs listed globally saw record net inflows of US$600 Bn; 53.6% more than net inflows for the whole of 2016, and almost double that of the previous YTD record for the same period of US$326 Bn set in November 2016. November 2017 also marked the 46th consecutive month of net inflows into ETFs/ETPs, with US$61.5 Bn gathered during the month.
At the end of November 2017, the Global ETF/ETP industry had 7,118 ETFs/ETPs, with 13,471 listings, assets of US$4,742 Bn, from 346 providers on 70 exchanges in 56 countries.
Institutional use of ETFs/ETPs has increased by 44% between 2009 and 2016. An analysis by ETFGI found that 4,450 institutional investors in 53 countries and 8,477 mutual funds in 50 countries reported owning at least one ETF or ETP in 2016.
The five countries in 2016 with the largest number of institutions using ETFs and ETPs are the United States, the United Kingdom, Germany, Canada and Switzerland. In aggregate, institutions in these countries represent 81.2% of total global users.
Although the ETF market’s growth has been remarkable, it’s worth remembering that assets in ETFs account for just 4.3% of total mutual fund assets in Europe.
1: Assets invested in ETFs/ETPs listed globally
Equities regain most favoured status
ETFs and ETPs listed globally gathered net inflows of $61,467 Mn in November. Year to date, net inflows stand at $600,151 Mn. At this point last year there were net inflows of $325,736 Mn.
Equity ETFs/ETPs saw net inflows of $47,548 Mn in November, bringing year to date net inflows to $423,042 Mn, which is greater than the net inflows of $170,062 Mn over the same period last year.
Fixed income ETFs and ETPs experienced net inflows of $8,590 Mn in November, growing year to date net inflows to $136,442 Mn, which is greater than the same period last year which saw net inflows of $104,943 Mn.
Commodity ETFs/ETPs accumulated net inflows of $414 Mn in November. Year to date, net inflows are at $9,138 Mn, compared to net inflows of $33,548 Mn over the same period last year.
2: Global ETF/ETP 2017 net new assets by asset class
Source: ETFGI data sourced from ETF/ETP sponsors, exchanges, regulatory filings, Thomson Reuters/Lipper, Bloomberg, publicly available sources and data generated in-house. Note: This report is based on the most recent data available at the time of publication. Asset and flow data may change slightly as additional data becomes available.
Regulatory and political trends
In Europe, Asia and Latin America, the use of ETFs and ETPs by financial advisers and retail investors is still low compared to the United States. In many countries across Europe, Asia and Latin America financial advisers are still paid to sell products. The introduction of the second Markets in Financial Instruments Directive (MiFID II) in January 2018 will end this distribution policy for independent advisers in Europe. In turn, this will be a benefit for ETFs as ETFs do not pay commissions to those distributing them.
In the UK the Retail Distribution Review (RDR), which banned the payment of commission to independent financial advisers for selling products, was implemented in 2013. There has been an increase in the use of ETFs, but the increase has been slower than many expected as a result of many investment platforms not offering ETFs. Many platforms have justified this policy by arguing that there is insufficient demand for ETFs.
In fact, globally adding ETFs to most platforms requires a technology upgrade as platforms that have historically offered only mutual funds did not have nor need connectivity to trade. And platforms that have added ETFs typically do not include ETFs in comparisons when a search is done to compare products tracking an index.
In the UK the Financial Conduct Authority (FCA) is conducting a review of platforms, which should help to facilitate a more level playing field for ETFs in the future.
Globally Robo-advisers account for a small amount of assets but, unlike platforms, most robo-advisers only use ETFs. The passing of significant wealth to millennials, which is expected to take place over the next 10-15 years, will be beneficial to robo-advisers.
In Europe, MiFID II will provide more transparency around ETF trading, which will be helpful as many investors still have a relatively poor understanding of the trading and liquidity of ETFs. Today about 70% of the trades in ETFs in Europe are done on an over-the-counter (OTC) basis as MIFID I did not make the reporting of ETF trades mandatory.
The competition within the ETF market continues to intensify as all providers try to find an edge to distribute and grow their assets. The providers of ETFs/ETPs have been competing by lowering fees, creating core product series with lower fees, pursing distribution arrangements with robo-advisers, via partnerships and through acquisitions.
Most Asset Managers will create an ETF strategy.