The ETF Network Effect

Sweeping developments within the investment management industry are putting ETFs on course to gather more assets over the next five years than in the previous 25 years combined.

— BlackRock, May 2018

Exchange traded funds are the most powerful investing trend of this century. The 21st Century began with fewer than $100 billion in ETF assets and now counts $4.7 trillion and an ever-expanding number of products. More recently, global ETFs grew at an organic annualized rate of 19% from 2009 through 2017, easily outpacing the 4.8% growth rate for other open-end funds.
Source: Investment Company Institute, ETFGI as of March 2018. Data from BlackRock, Morningstar worldwide open-end funds including money-market funds and excluding funds of funds.

Expect ETF adoption to accelerate. Sweeping developments within the investment management industry are putting ETFs on course to gather more assets over the next five years than in the previous 25 years combined.
Source: BlackRock, May 2018

Global assets are poised to double to at least $10 trillion over the next five years. Extending ETFs’ annual organic growth rate 10 years into the future (with the higher margin of error that implies) points to assets topping $20 trillion, possibly reaching $25 trillion, by the end of 2027.

Four trends will fuel future ETF growth, especially in the U.S. and Europe:

  • Portfolio construction preferences are shifting with the recognition that management fees have significant impact on long-term returns. Use of low-cost, index-based ETFs as core positions is likely to grow with ETFs increasingly used as building blocks in asset allocation and as vehicles to deliver factor-based investment strategies.
  • A transformation in the business model for financial advice is under way in the U.S. and will soon begin in Europe. ETFs are positioned to be prime beneficiaries of this secular transition, since financial advisors and wealth managers will have incentives to place low-cost ETFs at the heart of portfolios.
  • Bond trading is evolving. The liquidity that many institutions once took for granted is evaporating. To facilitate large transactions, investors are increasingly likely to use bond ETFs alongside single securities.
  • ETF market scale and product standardization will reinforce adoption. As more investors participate, and the market expands, ETFs become more efficient to trade and cheaper to own. The network effect will accelerate future ETF adoption by investors big and small.

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