Exchange traded funds have hit the financial industry by storm as trillions of dollars in global wealth have found their way into the convenient investment vehicle.
For instance, as of January 31, 2017, State Street (NYSE: SST) was managing more than $2 trillion in global ETF assets and servicing 55% of the global industry’s ETFs and exchange traded products under management, reports Chuck Epstein for Chief Investment Officer.
Due to its efforts, State Street was also named the best custody service provider at this year’s Fund Action ETF innovation Awards.
Frank Koudelka, senior vice president at State Street, argued that more investors are turning their business to State Street “because of our commitment to the exchange-traded product structure, our ongoing investment in our proprietary, core platform, and our scale.”
Contributing to the recent spate of demand for ETF products, broad beta ETFs “still encompass the lion’s share of the market,” Koudelka said.
“We have seen acceleration in the launches of smart and strategic beta and actively-managed ETFs,” Koudelka said. “The smart and strategic beta ETFs have been primarily across the equity asset class and actively-managed across fixed income.”
Smart beta strategies make up a relatively new segment of ETF industry, but this new breed of investments are quickly growing. According to XTF data, there are 2,015 U.S.-listed ETPs with $2.878 trillion in assets under management, with 675 enhanced or smart beta ETFs holding $577.7 billion in assets.
Another factor fueling ETF growth has been new strategies from robo-advisory services and ETF strategists crafting investments based on ETFs. Koudelka also pointed to a growing number of traditional mutual fund asset managers increasing their use of ETFs as an underlying holding in their portfolios as well.
Looking ahead, retail investors and an increasingly rising number of institutional investors could continue to fuel growth for ETFs.
“The biggest gains in ETF trading will see the US market continuing to lead this market with a maturing retail and institutional marketplace,” Koudelka said. “Most other global domiciles are dominated by retail or institutional. Having both of these markets adopting the ETF wrapper allows for increased liquidity via trading, narrowing spreads, and making the products more attractive for retail and advisor adoption.”
Moreover, the ongoing shift from commission-based financial advisory businesses to a fee-based model has also contributed to the greater demand for cheap, passive index-based ETFs.
Increased retail and advisor adoption will occur “due to migration of advisors to fee-based business,” Koudelka said. “This should drive growth to robo-advisors and wrap/model portfolios. Additionally, fee pressure on active mutual fund managers will increase adoption of these strategies utilizing the ETF-wrapper. This will enable asset managers to maintain most of its fee, while reducing expenses like embedded commissions and shareholder servicing.”
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