The U.S. exchange traded fund business could more than double in the next five years to over $3.5 trillion, according to BlackRock’s iShares.
U.S.-listed ETF assets currently stand at about $1.5 trillion.
“Growth in the U.S. is expected to be primarily driven by increased ETF usage by existing and new investor segments, ETFs as core exposures and a widening investor base for fixed income ETFs,” according to BlackRock (NYSE: BLK).
These are still the “early days” of ETF adoption, said Mark Wiedman, the Global Head of iShares.
“Even in the most mature market, the U.S., there is an incredibly bright future,” he added. “Our industry has so much exciting work yet to do with clients – in placing ETFs at the core of portfolios, deploying ETFs in undiscovered ways, and expanding ETF technology into whole new swathes of the capital markets.”
According to iShares, growth in the U.S. ETF market will be primarily driven by six key trends:
1) Continued growth of the advised market: The continued growth of fee-based advisory and greater ETF adoption by financial advisors of all shapes and sizes is expected to continue to drive ETF growth in the retail market. Advisors blending active and index products together in a portfolio, coupled with end investors learning more about the benefits of ETFs and requesting these products from their advisors, are seen as being contributing factors.
2) Self-directed as the fastest growing portion of the market: With an addressable market of more than $4.0 trillion and a projected growth rate of 9%, self-directed investors should have a significant impact on ETF adoption and growth. The expansion of commission-free ETF platforms and marketing directly to the self-directed investor will likely also continue to factor in this growth trajectory.
3) Increasingly more institutional investors using ETFs in new ways: Existing and new institutional clients, particularly asset allocators, are increasing their investments in ETFs. Nine out of 10 institutional ETF users expect their level of ETF investments to remain stable or increase over the coming year, and half plan to increase their allocations by 2014. Institutions are also discovering how to use ETFs in innovative ways, leveraging their access and liquidity to meet their investment needs.
4) Retail and institutional clients adding ETFs for core exposures: To date, ETFs have largely been used to take a market position, but more and more buy-and-hold investors are using both equity and fixed income ETFs for core exposures. While this trend is at the beginning of the adoption curve, from 2011 to 2012 assets in core exposures grew nearly 30%, and 2013 is off to a strong start in flows.
5) The continued revolution of fixed income products: After more than a decade of continuous growth, fixed income ETFs are just starting to take their place as an essential fixed income capital market instrument. The U.S. fixed income market is more than twice the size of the equity market, however, fixed income ETF penetration is only one tenth of the level of equity ETF penetration. Changing demographics, the ongoing evolution of the bond markets and greater awareness of fixed income ETFs from a wider investor audience will all lead to increased adoption.
6) New products and segments: There is a significant opportunity to expand the existing ETF market through new ETF products and new client segments. The next generation of ETFs should deliver innovative exposures, such as low volatility and term-maturity, as well as solutions-based products. New client segments such as banks and offshore investors are just starting to discover ETFs but will drive the next phase of growth.