Perhaps no instruments reflect the diversity and innovation of the financial sector better than exchange-traded funds (ETFs). They are also now a firm fixture of pension fund investing, embraced by 37% of European institutional investors, as EDHEC-Risk’s latest survey shows.

The opening chapter of this guide explores key trends in the market. After 15 years of asset and product proliferation, alongside expansion in the numbers of providers, we may soon see consolidation among the smaller players. 

No-one seriously expects new and smaller players to significantly dent the market share of the major players, BlackRock, Vanguard and State Street. But the market may bifurcate, with providers of scale and product breadth on the one hand and niche specialists on the other. 

Another trend is the emergence of new digital platforms tailored to the Millennial generation, whose older members are approaching their mid-30s, prime time for saving and investment. 

The growth of robo-advisers, where large US financial institutions have been on an acquisition spree to snap up start-up robos, is also favourable to the ETF market. As defined contribution pensions grow, so does the need for advice and simple, tailored investment products with embedded asset allocation. Robo platforms thrive on a diet of passive solutions, and many will use ETFs. .

A key market concern of late has been liquidity, magnified by the flash crash of 24 August 2015. One area of particular concern is the liquidity of high-yield bonds, which have attracted considerable asset flows since the 2008–09 crisis. The issue is with the underlying assets and not the ETF wrapper, of course, but the onus will be on investors to be aware of potential liquidity risks, and for providers to design products appropriately. Regulatory scrutiny is probably inevitable.

Overall, the ETF market continues to grow; PwC believes assets will reach $5trn (€4.4trn) by 2020 as interest in passive investing continues, alongside newer strategies like factor investing. Doubtless this market will continue to innovate as asset levels increase. 

Liam Kennedy

Investment & Pensions Europe