The rapid growth of the ETF business gets plenty of hype. However, one research firm believes the industry could already be slowing down as providers come out with fewer break-through product innovations.
“While we agree ETFs have ample scope for growth, we estimate industry growth will disappoint more optimistic estimates and is likely to decelerate beyond the next decade, unless ETF can evolve away from its roots as a passive product or break into untapped distribution channels,” according to a BernsteinResearch report.
The researchers calculate that ETFs will experience a compound annual growth rate (CAGR) of 13% through 2025, with ETF products gathering $6 trillion in assets, but if the industry is able to break away from passive products or venture into untapped distribution channels, like 401(k)s, the CAGR could go up to 17%.
For instance, in the defined contribution space, mutual funds hold 27% of assets under management and ETFs make up less than 1%. ETFs face technical hurdles, less advantages to mutual funds and unwillingness to expand among fund and defined contribution providers.
Meanwhile, ETF observers believe the $1.2 trillion U.S.-listed ETF market will attract $2 trillion by 2013, $5 trillion by 2015 and $10 trillion by 2020.
The ETF industry may continue to experience continued high growth if ETFs rise in usage among retirement plans, retail financial advisor channels, institutional investors, actively managed structures and European ETF markets.
BersteinResearch also discovered that ETF assets under management accrued has helped curb the growth of Index mutual funds, not at the expense of mutual funds. Overall, ETFs has increased demand for packaged products.
Furthermore, institutional investors make up the lion share of ETF demand, and about one-third of volumes come out of equity funds, which suggests that retail investors are more interested in packaged products than individual stocks.
For more information on ETF asset flows, visit our ETF performance reports category.
Max Chen contributed to this article.