The Contributing Drivers of ETF Growth

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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