Institutional investors are expected to remain the dominant source of investment in exchange-traded funds, shows a survey by Ernst & Young.
The firm's "Global ETF Research 2017: reshaping around the investor" survey found that 97% of respondents expect institutional investors to continue to dominate ETF investing over the next three years. The survey also found 15% to 25% of ETF inflows over the next three years are expected to come from new investors, equating to inflows of $250 billion.
Two-thirds of respondents said most money managers will have an ETF offering in the coming five years, with the market set to grow 73% to $7.6 trillion globally by the end of 2020. ETF assets under management totaled $4.4 trillion as of the end of September, said a survey report.
Pension funds are expected to use ETFs for liquidity management going forward as well as to access selected exposures, while certain hedge funds will use leveraged and inverse ETFs to execute high-conviction long or short positions, said the report.
EY also said there are particular opportunities for insurers. European respondents said insurers are the least-promising institutional segment for ETFs, "but (ETF proviers) may not appreciate the rationale for insurers' requests for data on underlying holdings, securities lending, synthetic exposures and other areas," said EY's report. These issues are driven by requirements under Solvency II rules.
"Promoters that understand these requirements and can help insurers to reduce the costs of ETF investment could see a powerful boost in demand. Following the recent policy changes by (the National Association of Insurance Commissioners), U.S. promoters have already identified new opportunities with insurers," said the report. The NAIC recently lowered the risk designation of fixed-income ETFs, which brings capital charges for insurers into line with direct bond holdings, said the report. "This will make it far easier for promoters to market fixed-income ETFs to insurers. In Europe, there is the potential for Solvency II to have a similar effect, but there seems to be limited awareness of this opportunity among promoters."
The report also addressed falling fees associated with ETFs. Total expense ratios have fallen to 27 basis points from 29 basis points in the past year, and 71% of respondents expect margins to fall further over the next three years as providers work to survive in a competitive environment.
EY surveyed 70 ETF promoters, market makers and service providers across the U.S., Europe and Asia. These respondents run 85% of global ETF assets under management. Interviews took place between May and September.