Developed markets characterized by low interest rates and lackluster performance are driving investors to seek out cheaper products such as ETFs so they can keep more of their returns, according to a report.

“ETFs have taken 57% of total mutual fund flows into US long-term assets YTD, and we expect further penetration in fixed income and international markets,” Morgan Stanley analysts said in a recent note. “We also think ETFs will be the first to see any cyclical pick-up in flows, though pricing pressure could squeeze out all but the truly scaled firms or those with a product edge.”

Larger ETF providers such as Vanguard, BlackRock and Charles Schwab are taking steps to cut ETF costs as the fee war escalates. [Is the ETF Fee War Raising the Barriers to Entry?]

Global ETF growth has compounded at about 25% after the financial crisis, according to Morgan Stanley. At roughly 6% of global mutual funds the analysts see “significant further growth potential” for the ETF business.

Fixed-income ETFs have enjoyed the strongest growth in recent years but only account for 18% of total assets under management in the industry.

Low returns are likely to lead to further penetration of ETFs as investors focus on cost-efficient asset allocation, the Morgan Stanley analysts wrote.

“ETFs and multi-assets products should benefit from low cost and as investors/advisors outsource asset allocation at the expense of core active,” they added.

The opinions and forecasts expressed herein are solely those of John Spence, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.