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ETFs: The test is yet to come

The growth of fixed-income ETFs represents both an opportunity and a challenge for providers. On the one hand, increasing sophistication in bond trading allows for greater innovation in product breadth and granularity. On the other, greater levels of investment in less liquid strategies, for instance in high yield, have led to a particular regulatory focus on such strategies.

Regulations like MiFID II should help increase transparency in ETF trading, arguably an area that needs more focus given the relative lack of understanding of investors and some regulators.

Yet with annual compound asset growth of 20% since 2008 and global ETF assets predicted to reach $7trn (€5.95trn) by 2021, according to PwC, greater regulatory scrutiny on the ETF market overall can be expected. Given the magnitude of asset flows, any future market stresses, particularly in less liquid credit markets, will surely provide ETFs with their greatest challenge yet.

Exchange-traded funds are also at the heart of a debate on the relative merits of active and passive investing. Arguably, as the most prominent public face of passive, they attract more than their fair share of scrutiny; yet European ETF assets account for only 4.3% of total mutual fund assets.

In the wider investment world, the evolution of passive has provided a lucrative area of growth for ETFs. Indeed, smart beta, or factor investing ETF assets are now over $600bn (€510bn) worldwide. Smart beta itself blurs the boundaries between active and pure passive somewhat, leading to questions about index design and construction methodology.

The shape of the ETF market is also a subject for scrutiny, dominated as it is by a few players with scale and many more smaller providers. As such, more than half of the ETFs and ETPs listed in Europe have assets of less than $50bn. 

With assets already surpassing the $4trn mark, ETFs are an undoubted success in the constellation of asset management products. With growing transfer of wealth to Millennials and increasing use of robo-advisers (which favour ETFs) in defined contribution pensions, there is still every sign that a strong growth trajectory can continue.  

Liam Kennedy, Editor, Investment & Pensions Europe 

Editor’s note: this guide contains a number of sponsored articles, as indicated opposite the frontispiece. The publication of these articles should not be taken as an endorsement of their contents.

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