The global exchange traded products industry recently celebrated another milestone, that being reaching $3 trillion in combined assets under management at the end of May. Goldman Sachs sees that figure doubling and doing so by 2020.
Josh Brown of Reformed Broker fame posted Goldman’s ETF outlook Monday and the report includes sound reasoning for why the ETF industry’s rapid growth will continue at an accelerated clip.
“We think ETFs will continue to see robust asset gathering (15% ann. over last 3 yrs), above and beyond the passive vs. active debate,” said Goldman. “Specifically, we expect ETFs to continue growing at an 12%-13% organic rate, likely doubling in AuM to +$6tn by 2020 amidst rapid growth in RIA, roll-over of 401(k) into IRAs, increasing use of auto-allocation products, regulatory push into lower-cost products, geographic expansion, and innovation.”
One way of interpreting that data is that retirement accounts will be primary drivers of ETF growth. So imagine what the ETF industry would look like if it could gain traction in 401(k) plans, something large mutual fund issuers are fighting tooth and nail to prevent. [Low Fees Suport ETF 401(k) Push]
“Over the next 10 years, we estimate ~$740 billion in ETF flows resulting from 1) DC assets rolling off into IRAs as workers retire (est. $6.3tn, adding $440bn in ETFs), 2) retail assets moving from wirehouses to independent advisors (est. $2.7tn, adding $300bn in ETFs), and 3) increasing regulatory scrutiny on management fees on retirement assets under advisory,” notes Goldman.
Doubling the size of an asset class, particularly one that is already home to over $3 trillion in assets, in just five years is no small feat. Data from ETFGI help put the move to $6 trillion from $3 trillion into context. [ETFs Top $3 Trillion in Assets]
“It took the global ETF/ETP industry 19 years to reach US$1 trillion in assets under management, 23 years to reach US$2 trillion in AUM and just 25 years to reach US$3 trillion in AUM. The increasing rate of asset growth illustrates how ETFs have been embraced as an investment solution by institutional investors, financial advisors and retail investors around the world,” according to Deborah Fuhr, managing partner of ETFGI.
The U.S. is leading ETF industry growth. At the end of April, U.S.-listed exchange traded products had a combined $2.132 trillion in AUM, up from $2 trillion at the end of last year, according to ETFGI. [U.S. ETFs hit $2 Trillion in AUM]
Of course, industry growth should reward the share prices of ETF issuers as Brown points out.
“The implication is that the asset management firms with compelling products for these growth opportunities (WisdomTree, BlackRock, Invesco) will disproportionately reward their shareholders as The Street prizes average fee growth over average AUM growth,” he notes.
Over the past two years, shares of WisdomTree (NasdaqGS: WETF), the fifth-largest U.S. ETF issuer are up almost 75%. BlackRock (NYSE: BLK), parent company of iShares, the world’s largest ETF issuer, is up 26.3%. The Financial Select Sector SPDR (NYSEArca: XLF) is up 23.8% over the same period.
Chart Courtesy: ETFGI