Global assets under management (AUM) in exchange traded funds (ETFs) and exchange traded products (ETPs) are anticipated to increase by 20 to 30 percent annually over the next three years, taking the global ETF/ETP industry to approximately US$2 trillion in AUM by early 2012, according to BlackRock’s Global ETF Research and Implementation Strategy Team.
According to a year-end industry recap and outlook produced by the BlackRock group, the global ETF and ETP industry combined had 3,503 products with 7,311 listings and assets of US$1.482 trillion, from 168 providers on 50 exchanges around the world as of December 31, 2010. This compares to 2,672 products with 4,856 listings and assets of US$1.156 trillion from 132 providers on 45 exchanges at year end 2009.
“The industry grew across the board during 2010 and we expect this to continue in 2011,” said Deborah Fuhr, Global Head of ETF Research and Implementation Strategy at BlackRock.
ETFs are index based open-ended funds that can be bought and sold like ordinary shares on a stock exchange. They have become popular and widely used investment vehicles to facilitate many investment and diversification strategies — from short-term tactical applications to longer-term strategic applications. The ETP industry includes other product structures such as trusts, partnerships, commodity pools and notes.
Considering ETFs separately, AUM will reach US$2 trillion globally by the end of 2012, US$1 trillion in the US in 2011 and US$500 billion in Europe in 2013, Ms. Fuhr projects.
ETFs Emerge as Key Indicators of Market Sentiment, With Asset Flows in 2010 Tracking Investor Shift to Equities
Taking ETFs and ETPs together, US AUM should reach US$2 trillion in 2013, with European AUM reaching US$500 billion in 2012.
Factors driving expanding use of the vehicle include the number and types of equity, fixed income, commodity and other indices covered, more fund platforms embracing ETFs, more active marketing of ETFs by online brokers, greater involvement by fee based advisors, the growing number of exchanges planning to launch new ETF trading segments, and regulatory changes in the US, Europe and many emerging markets that allow funds to make larger allocations to ETFs, Ms. Fuhr said.
“Demand for ETFs globally has surged as professional and retail investors alike have discovered their unique combination of benefits, such as versatility, transparency and significant cost advantages,” Ms. Fuhr said. “The availability of cost effective, flexible, liquid, diversified investment products that enable rapid implementation of a comprehensive range of investment strategies has struck a chord with investors – during both bull and bear markets.”
Capital Flows Track Investors’ Return to Equities
Capital flows in 2010 within ETFs demonstrate that the products are becoming key indicators for shifts in investor sentiment between asset classes. “During 2010, developed and emerging equity ETFs enjoyed heavy inflows,” Ms. Fuhr said. “On the other hand, fixed income and commodity ETFs/ETPs received smaller net new asset flows than in 2009 as some investors adjusted their risk profiles.”
In 2010, US$169.4 billion in net new assets went into ETFs/ETPs, compared with US$176.3 billion net new assets in 2009.
Equity ETFs/ETPs attracted US$106.3 billion in net new asset flows in 2010, greater than the US$69.1 billion for all of 2009. Net new asset flows into ETFs/ETPs tracking developed market equity indices were US$64.2 billion in 2010, compared with US$34.6 billion in 2009. ETFs/ETPs tracking emerging market indices drew US$42.1 billion in net new asset flows, compared with US$34.5 billion in 2009.
Fixed income ETF/ETP net new assets were US$37.7 billion in 2010 compared with US$54.3 billion for 2009. Net new assets going into ETFs/ETPs with commodity exposure were down significantly, from US$46.2 billion in 2009 to US$22.7 billion in 2010.
Securing Broad Exposure While Managing Risk
The challenging market conditions of 2008 and 2009 caused a significant shift in investors’ risk appetite and their desire for liquidity. During 2010, many investors found that ETFs met their need for greater transparency regarding cost, holdings, price, liquidity, product structure, and risk and return related to investment alternatives, Ms. Fuhr noted.
“ETFs make it easier for investors to participate in all domestic asset classes, global regions and industry sectors,” she said. “Most importantly, ETFs give investors the opportunity to participate where markets have been showing promise.”
At the same time, despite growth in the use of ETFs covering alternative asset class exposures, investors will continue to prefer ETFs based on broad-market indices that serve as core holdings, Ms. Fuhr said. “With today’s increased market volatility, no single sector, style, or stock consistently outperforms its peers,” she said. “Having core holdings invested in broad-market indices not only helps reduce volatility but can also achieve competitive returns for the overall portfolio.”
“ETFs have fundamentally changed the way both institutional and retail investors construct investment portfolios,” said Ms. Fuhr. “We expect ETFs to continue to be one of the preferred investment vehicles for low cost beta exposure across both retail and institutional markets.”
Industry Growth Underscores Educational Need
The industry’s growth continues to underscore the need for market-wide education regarding how ETFs and ETPs work, different product designs, and effective applications of the product set, Ms. Fuhr said.
“ETFs are one of the greatest financial innovations of recent years and their future is bright — but the industry is at a critical crossroads,” said Ms. Fuhr. “Clarity is essential if the industry is to help investors understand ETF and ETP structures and mechanics as well as the tax and regulatory implications of using ETFs and ETPs. In addition, agreeing on the definitions for the various product structures is one of the pressing needs of the industry in 2011.
“Greater transparency around product structure, replication of indices, and pricing is vital to helping investors make informed investment decisions when considering ETFs and ETPs,” she said.
