ETFs To Overtake Hedge Funds?

By Editorial 18 February, 2014

The exchange traded funds (ETF) industry could surpass the hedge fund industry for assets under management (AUM) in the next 12-18 months according to EY's Global ETF Survey.

While growth rates will be highest in Asia and lowest in the more mature US market, the growth drivers will be the same across all markets: foreign currency share classes, fund of fund ETFs, new emerging market funds and commodity ETFs.

Antoinette Elias, EY's Oceania Wealth and Asset Management Leader, says: "Growth will come from innovation, from more wide-spread users of, and uses for, ETFs as they take market share from competitors."

"However, this year's survey also found a growing awareness amongst promoters that this innovation leaves them open to increased risk, that 'someone else's mistake' could undermine the industry in the eyes of regulators and consumers and damage the whole industry's growth prospects," Elias said.

The EY Global ETF Survey interviewed more than 60 promoters, market makers, investors and service providers over 13 markets, including promoters representing 87 percent of the industry's global assets. The interviews were conducted during October and November 2013.

Growth rates in Asia-Pacific are among the highest in the world at around 20-30 percent per annum, compared to an average of 15-20 percent in Europe and 15 percent in the relatively mature US market, which holds around 70 percent of global ETF assets, the survey found.

Expectations of retail growth have become more upbeat across the globe this year, with 49 percent of respondents expecting retail investors to drive strong growth, compared to just 20 percent last year. Asian respondents in particular see strong potential for retail take up of ETFs (57 percent).

However, this year the industry also seems increasingly aware of how vulnerable it could be to the negative effects of a scandal, especially in the retail market. Those surveyed think that regulators should be focusing their attention on leveraged ETFs and ETFs not covered by European Securities and Markets Authority and Undertakings for Collective Investment in Transferable Securities (UCITS).

Achieving scale remains the leading barrier to entry and is a greater challenge in 2014 than it has been in previous years. In addition, lack of liquidity is the most frequent reason that fund launches fail. More than 90 percent of those surveyed view USD50m as the minimum size for an ETF to be viable, with more than a third saying USD100m was the minimum requirement.

"The importance of liquidity and its close link with scale continues to act in a self-reinforcing way," Elias said. "As a result new entrants are finding it increasingly difficult to compete directly with the industry's largest players. Eighty percent of those surveyed said they expected the top three's market share to remain stable and a further 15 percent expect it to grow."

Tags: Wealth | Investment | Investment Funds | Hedge Funds | Stock Exchanges | Currency | Retail | Trade | Expats | Investment | Europe | Asia-Pacific | Invest | Investment |


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