The report, ‘ETF 2020: Preparing for a new horizon’ (“ETF 2020”),  which surveyed executives from 60 ETF sponsors, asset managers and service providers  around the world that account for over 70% of global assets, reveals more than three out of four executives expect ETF assets to at least double, to reach $5 trillion or more by 2020.

ETF landscape becomes more global and advanced
According to ETF 2020, asset flows in the developed markets of the U.S and Europe will continue to dominate the ETF landscape. However, the highest rates of growth will be found in the less mature markets.

Institutional investors are widely expected to be the primary growth driver with insurance companies, pension plans and hedge funds in particular, projected to be significant sources of demand for ETFs.

New types of indexing (also referred to as “smart beta”) represent a hotbed of product development activity with 46% of firms surveyed identifying this as the most important area of innovation. PwC expects this to continue for the near term. Active ETFs (34%) and alternatives (29%) are also expected to be sources of significant ETF growth between now and 2020.

ETF sponsors are bullish on their financial prospects with 59% saying they expect their ETF business to become more profitable this year. 

Commenting on the survey, Christophe Saint-Mard, partner at PwC Luxembourg says:  “upgrading technology, resources and processes will be critical as the ETF landscape becomes more global and advanced, with a wider array of investors and new investment strategies offered in ETF form.”

ETF 2020 highlights that service providers will need to continue to adapt their business model by adding resources, streamlining processes, introducing more automation, globalising operations and upgrading technology.

Regulation to impact ETF growth
The regulatory environment is widely believed by the survey participants to have a significant impact on the growth and innovation of ETFs over the next few years. 91% indicated that regulations and taxes impact ETF growth. While new regulations could spark further growth if they permit further product innovation or lower distribution barriers; they could also dampen demand.

In Europe, new regulatory initiatives will be some of the biggest drivers of change in the ETF business, affecting distribution dynamics and the product landscape in particular.  MiFID II and Retail Distribution Review (RDR) are set to ban the use of commissions by independent financial advisors which to date worked against ETFs in the retail market. Going forward, active ETFs are expected to be a source of significant growth in Europe.  According to PwC, more streamlined operations to facilitate the cross-listing and settlement could make European ETFs much more attractive and cost effective.

“Shifts in the regulatory environment will continue to produce opportunities that will favour firms with local market knowledge. The ability to transform ETFs into effective solutions that address the needs of specific investor segments will be a particularly important factor in competing successfully,” says José-Benjamin Longrée, partner, Global Fund Distribution Leader at PwC Luxembourg.

“Despite myriad challenges, opportunities abound for existing ETF sponsors as well as other asset managers willing to develop a thoughtful and informed strategy as they prepare to address this market. Luxembourg plays a central position to distribute cross-border ETF,” concludes Christophe Saint-Mard.

To download a copy of PwC's report, ‘ETF 2020: Preparing for a new horizon’, please visit PwC Luxembourg website.