The exchange traded fund industry could grow over fivefold in the next seven years as the $9.7 trillion participant-directed defined contribution plan market and more financial advisors shift into the investment vehicle.

“The use of ETFs is nascent,” according to a Principal Financial report. “Only 2.5% of DC assets in the U.S. is invested in them. More and more financial advisors are likely to channel assets into them, such that the total ETF assets will top $9.5 trillion by 2020, up from the current level of $1.7 trillion.”

Principal Financial also highlights the growing acceptance in actively managed ETF offerings.

“As their registration process becomes less onerous, active ETFs in particular are likely to proliferate and drive this growth,” the report added. “Indeed, plans are afoot to create ETFs based on lifecycle risk, with distinct tilts towards healthcare, life sciences, fuel and retirement communities backed by simple hedges.”

Looking at popular strategies in defined contribution plans, Principal Financial found that target-date funds, which have $500 billion in assets as of 2012 and reset asset allocations in a portfolio according to a set time frame, will “likely” grow at a compound annual growth rate of 15%.

The firm also discovered that plan participants are increasingly adopting new investment approaches to retirement, with legacy assets being fazed out. Other top strategies include balanced funds, traditional cap-weighted index funds, active equities and bonds, and target-income funds.

The report reveals that there are a number of hurdles plan participants face as investors prepare for retirement. For instance, 74% of participants are not saving enough, 70% are not saving early enough, 69% are living beyond their means, 66% are over-estimating their ability to plan and 62% are putting off a financial plan.

For more information on ETF asset flows, visit our ETF performance reports category.