The global exchange-traded fund (ETF) market is expected to double over the next four years to reach more than $20 trillion, according to a new PwC report.
Based on a survey of 60 fund or service provider executives across four regions in June 2021, the PwC study found more than half of respondents tipped ETF assets under management (AUM) would rise to about US$18 trillion by 2026.
But the report says the mooted consensus target might be overly conservative given recent trends in the sector that have underwritten a more than 20 per cent compound annual growth rate (CAGR) during the five years to the end of 2020.
“… we believe that a projection of over $20 trillion global ETF AUM by 2026 can be achieved, representing a 17% CAGR over the next five years,” the paper says.
The PwC report says “record inflows, new entrants, innovative products and distribution opportunities” abound for ETF operators, albeit with some growing pains ahead.
“However, the next big leap in the scale, reach and investor choice within the ETF market will also bring heightened competition, complexity and continued regulatory scrutiny,” the study says.
While the US continues to lead the pack, the Asia-Pacific (APAC) region should also see ETF assets double by mid 2026 from the current US$1 trillion or so.
In fact, APAC had seen the fastest ETF growth-rate over the previous five years, the PwC paper says, with an increase of almost 230 per cent during the period.
“Looking ahead, we expect this rapid expansion for ETFs to continue. Regional markets are becoming increasingly harmonised and integrated with one another,” PwC notes. “Regulatory developments are also opening up opportunities for innovation. Bullish Asia-Pacific survey participants expect AuM to rise to at least $2 trillion by 2026, a CAGR of 15%. More than a third of survey participants expect an even bigger jump to $3 trillion – representing a CAGR of around 25%, closer to the Asia-Pacific ETF growth rate since 2016.”
APAC respondents – along with those in Europe and Canada – picked thematic ETFs as the biggest growth opportunity over the next two to three years: by contrast, US participants overwhelmingly (almost 90 per cent) voted fixed income as the most promising near-term growth-driver for the sector.
The study also found growing support for sustainable and crypto-asset ETFs across all regions with active products also on the up.
“… recent years have seen a marked acceleration in active ETF uptake across the globe,” the report says. “Active ETF AuM have increased six-fold since 2014, reaching $405 billion in September 2021.”
Of those providers looking to expand in the APAC ETF market, about a third favoured “passporting” in existing regulated products from their home regions; a similar proportion said they would launch APAC-domiciled vehicles.
The remaining respondents were almost equally split between partnering with an existing APAC provider to offer ETFs or simply marketing US-domiciled products to investors in the region.
ETFs are also likely to benefit as digital distribution channels continue to open up across the world in a trend accelerated by the COVID-19 pandemic, the PwC study says.
“Online platforms stand out as the primary source of expected ETF demand. While this trend is evident worldwide (84% looking ahead to significant demand), it’s especially marked in the US and Canada (96% and 93% respectively anticipating significant demand),” the report says.
“The integration of digital wealth platforms with big data and artificial intelligence (AI) is increasing retail interest in ETFs. While digital native millennials and Gen Z have been at the forefront of this trend as they look for easy access and direct control over their investments, other generations are catching up fast.”
But financial advisers remain an important distribution channel for ETF providers, the report says.
Both Australia and NZ have experienced rapid growth in their respective ETF markets over recent years. The Australian ETF market grew about 44 per cent last year to reach A$130 billion while the NZX-owned Smartshares saw ETF assets under management increase over 17 per cent during the 12 months to the end of February this year.
However, the Smartshares ETF total of $5.6 billion understates the exposure of NZ investors to the product type with many going direct to offshore exchanges.