The explosion in ETF assets — to $2.9 trillion in 2015 from $204.3 billion in 2003 — is evidence of a broad shift in the way investors approach asset allocation. No longer content to build a generic 60/40 stock/bond portfolio, investors are looking for any edge they can find to increase performance and lower volatility.
The exchange-traded funds industry has helped fill this void by providing investors with a simple way to gain investment exposure to virtually any asset class, geography or sector. According to research and consultancy firm ETFGI, there are now almost 2,000 ETF and exchange-traded notes products listed on U.S. exchanges, and more than 6,000 around the world, each with a distinct approach. Cerulli Associates estimates the total size of the market today is $3 trillion, and projects ETF assets to double by 2020.
The vast majority of these assets are controlled by the three largest ETF issuers: BlackRock Inc., State Street Corp. and Vanguard Group Inc. These market leaders account for approximately 90% of ETF daily trading volume occurring in a collective 1,200 funds.
While these firms have played a major role in pushing the ETF industry to its current heights, we believe the next evolution in the industry will be driven by smaller firms and new entrants. These firms, which include hundreds of small and midsize asset managers turned ETF providers, will drive growth and fuel product innovation.
Here is what's driving the next phase of growth in the ETF market and what it means for 2017.