The shift to self-directed retirement - as well as low yields, the rise in passive, low-cost investing, and an increase in digital advice and distribution - will help assets in exchange-traded funds (ETFs) balloon to $7.6 trillion by 2020, a new report has found.
But even with compound annual growth of 18 percent over the next few years, the success of ETFs isn't guaranteed. Cultivating relationships with advisors will play a vital role in ETF growth, the report also found.
ETFs globally had collected $4.4 trillion in assets by the end of September.
Findings were published in the Global ETF Research 2017 report by Ernst & Young, the company’s fifth annual global study of ETFs.
Without question, ETFs have made a name for themselves. They continue to attract assets and their structures appear “ideally suited” to develop innovative products distributed in an era of digital advice, the report said.
Still, that doesn’t mean ETFs will be around in 30 years as “questions persist over the possible performance of ETFs in a financial crisis,” the authors wrote.
Careful distribution and astute segmentation are, therefore, critical to ETF growth as marketers consider how advisors use ETFs, the report found.
Wealth managers are most likely to use ETFs for core exposures through model portfolios, for example, while some hedge funds use ETFs to help them execute long and short positions.
On the institutional side, where the bulk of global ETF inflows are expect to come from, private banks use ETFs for exposure to international markets and pension funds. Investment funds and insurers use ETFs for liquidity management.
“We believe that refining investor journeys – customizing experiences on the basis of enhanced segmentation – will be critical to sustaining industry growth,” the report's authors wrote.
Deepening the Retail Relationship
Retail advisors who use ETFs say they like ETFs for the diversification they bring to a client portfolio and the liquidity they offer.
Unlike mutual funds designed around a buy-and-hold strategy, ETFs trade throughout the day like a stock, so advisors can buy and sell several times during the day to adjust client portfolio positions quickly .
Advisors shouldn't be surprised to notice more ETF wholesalers and marketers coming their way.
ETF promoters could do more to improve the ETF retail user experience, the report said.
ETFs and internet-based advice algorithms, or roboadvisors, will play a key role in boosting ETF retail adoption. As a result, ETF marketers have shown more interest in partnering with or buying a roboadvisor, the authors wrote.
ETF marketers also want to improve relationships with financial advisors, private wealth managers, broker/dealers and hybrid advisors, advisories that merge machine algorithms and flesh-and-blood advice, the report said.
And why not?
Because advisors also offer ETF marketers a way to circumvent the traditional bank distributors, ETF promoters have every incentive to deepen relationships with advisors of all stripes, the report said.
InsuranceNewsNet Senior Writer Cyril Tuohy has covered the financial services industry for more than 15 years. Cyril may be reached at [email protected].
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