ETF sponsors want to access that $2.7 trillion market, but “they have their work cut out for them. More  than three out of four ETF firms say 401(k) platform support and product proliferation is a major or moderate challenge. Some managers have little to gain, since their mutual funds already play a large role in that market. Others are moving cautiously, aware that sales are not likely to come as easily in the DC market and leery of investing too heavily in an unproven opportunity,” according to PwC.

Another hurdle ETF sponsors face is, as PwC puts it, “lack of technical understanding.” Specifically, even advisors that see themselves as proficient in ETFs, fail to comprehend the difference between an ETF’s volume and its true, underlying liquidity. That scenario keeps advisors and their clients out of small of ETFs, some of which have surged this year. [10 Small Sector ETFs With Huge Returns]

Regulatory hurdles facing active ETFs are another hurdle to be dealt with.

“Some firms have already jumped through the hoops necessary to launch active ETFs, but the process remains a challenge as active ETFs are not subject to the same generic listing requirements as passively managed ETFs. Thus, the ETF sponsor must obtain approvals for each active ETF portfolio on Form 19b-4, which can take a year or more depending on the novelty of the filing to obtain SEC approval,” said PwC.

Other risks to industry growth highlighted by PwC include operational issues, such as liquidity, counter-party risk, tracking error and trade failures, and regulatory burdens.

Roles of ETFs in Client Portfolios

Chart Courtesy: PwC

ETF Trends editorial team contributed to this post.