Four big trends to drive ETF growth

Global ETF assets could reach $12 trillion USD over five years.

Exchange traded funds (ETFs) have advanced a long way since the first U.S. product launched in 1993. More investors are recognizing that ETFs offer a rich diversity of investment exposures at low cost, along with transparency and liquidity. Four trends are likely to fuel future ETF growth, especially in the U.S. and Europe.

1. ETF investors are active investors

ETFs are increasingly used in portfolios to seek outcomes that differ from the broad market. Investors are likely to step up their use of ETFs as building blocks in asset allocation and as vehicles to deliver factor-based investment strategies that seek to emphasize persistent drivers of returns.

2. Investors everywhere are sensitive to cost and demand quality

ETF adoption dovetails with the recognition by all types of investors that costs can have a significant impact on long-term returns. Lower cost, diversified ETFs will increasingly be used by self-directed retail investors and sophisticated institutions alike as core broad market exposures.

3. A transformation in the business model for financial advice

A transformation in the business model for financial advice is under way in the U.S. and beginning in Europe. Investors are increasingly paying wealth managers a transparent fee based on assets, instead of an indirect fee via brokerage commissions and retrocessions. A secular transition to fee-based advisory models puts a focus on lowering costs and using simple asset allocation. This backdrop could favor ETFs at the heart of portfolios.

4. An evolution in the way bonds trade favors ETFs for efficient market access.

The bond liquidity that many institutions once took for granted is evaporating. To facilitate large transactions, investors are increasingly likely to use bond ETFs alongside or instead of single securities.