At the end of April, there were nearly 7,400 exchange-traded products (ETPs), including exchange-traded funds (ETFs), listed around the world with a combined $4.969 trillion in assets under management.
In new research released earlier this week, BlackRock, Inc. (BLK), the world's largest asset manager, highlights several factors that could push global ETF assets beyond $12 trillion by the end of 2023. BlackRock is the parent company of iShares, the world's largest ETF sponsor. The research suggests that global ETF assets will ascend to $6 trillion by the end of 2019 and $7 trillion by the end of the following year before reaching $8.5 trillion at the end of 2021.
Should those forecasts prove accurate, that would continue a stunning growth trend for ETFs, which started this century with just $100 billion in a combined assets under management, according to BlackRock data. For the 10-year period ended April 30, 2018, the compound annual growth rate (CAGR) for global ETF assets was close to 19%. (See also: ETF Growth Spurt Will Continue.)
"ETF growth is often attributed solely to the strong performance of simple stock indexes relative to legacy active managers since the financial crisis," said BlackRock. "This view wrongly implies that investors have abandoned their attempts to beat the market and that future ETF growth is contingent on lackluster stock picking."
The asset manager notes that one major catalyst for ETF growth is the increasing importance of asset allocation over individual security selection. ETFs have become favored asset allocation tools because many are liquid, feature low expense ratios and offer investors exposure to myriad asset classes, including some that were previously expensive or hard to access.
Institutional investors are expected to drive ETF asset growth on multiple fronts. "Global institutions such as insurance companies, pension funds, asset managers and endowments increasingly use ETFs as tools for tactical investing in addition to long-term investment vehicles," said BlackRock. "About one-third of U.S. institutional investors surveyed in 2017 plan to increase ETF allocations over the next year. A separate Europe-focused survey found that 40% of institutions plan to increase their ETF allocations over the same period."
Factor-based, or smart beta, strategies are also expected to help ETFs continue pilfering assets from actively managed mutual funds. "Some factors, such as value, trace their roots back to the 1920s. ETFs in recent years have broadened access to other rewarded factors, including momentum, quality, size and low volatility," according to BlackRock. (For more, see: Survey Confirms Smart Beta Growth Trajectory.)
As has been widely documented, low fees are a pivotal factor behind investors abandoning pricier active funds for index funds and ETFs. While fees are falling across the fund universe, passive ETFs and index funds are significantly less expensive than their active rivals.
"Money flows illustrate a decade-long rotation away from active mutual funds into ETFs, primarily in U.S. equities: About $930 billion exited actively managed U.S. equity funds from 2009 through 2017, while about $848 billion moved into comparable ETFs over the same period," said BlackRock. Last year, only one of the top 10 ETFs in terms of new assets added had an expense ratio of 0.20% or higher. Year to date, that number is also one. (For additional reading, check out: Minimizing ETF Fees.)