Strong demand for exchange-traded funds from institutional investors is set to bolster passive strategies to account for at least 22% of total assets under management in Europe by 2025, said Moody's Investors Service.
The ratings agency said in a report that wider passive strategies, including index trackers, accounted for 14% of total assets at the end of 2017.
The 22% figure is a conservative base case; the agency's fast-case scenario sees passive strategies accounting for 27% by 2025.
The European ETF market accounts for €642 billion ($727 billion) of the region's total assets, equivalent to 6.2% of the industry. Under the base case, European ETFs will account for 11% by 2025, and the fast-case scenario would see European ETFs represent 14% of European assets under management by 2025. The report said ETFs account for about 18% of total assets under management in the U.S.
Institutional investors are expected to help this trend along, with ETFs set to become "a core part of institutional investor portfolios in the next five to 10 years due to their flexibility, liquidity and competitive cost," said Marina Cremonese, a vice president and senior analyst at Moody's, in a statement accompanying the report. Uses include tactical allocations and adjustments, and hedging and diversification. Moody's also said active strategies such as multiasset are also incorporating ETFs for cost and efficiency reasons.
Retail demand will be boosted by cost sensitivity, fee-based advice and online distribution, the report added.
Finally, Moody's said money managers with passive capabilities will benefit from growth, with large incumbents such as BlackRock (BLK), DWS Group and Lyxor Asset Management set to benefit the most and continue to grow market share in Europe.