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13th September 2018
The Future of ETFs
By Hoshang Daroga CFA, Portfolio Manager at Copia Capital Management
Summary:
Index investing has become increasingly popular since the Retail Distribution Review in 2012. With a keen focus on value for money, discretionary fund managers (DFMs) and independent financial advisers (IFAs) have been substituting higher cost active funds with index-tracking funds such as ETFs.
Whilst demand has been driven initially by DFMs, advisers have been replacing some core exposures in efficient markets – such as the US – with ETFs as a way of getting broad diversification whilst keeping costs down. However, we are also beginning to see signs of adoption by financial advisers, who are looking to include ETFs in advisory portfolios as a convenient way of getting diversification in a way that is transparent and cost efficient.
The growing usage of risk profiling and asset allocation tools – from firms such as Distribution Technology, Morningstar and EValue has rightly focused advisers’ minds on asset allocation as the primary driver of portfolio outcomes. Populating that asset allocation then becomes a choice between using active funds with expense ratios of 0.60% to 1.0% or index funds with expense ratios of 0.07% to 0.20%. In an era of low yields, the focus on cost is keen. This is why we are seeing increased usage of ETFs within model portfolios that rely on these asset allocation tools.
The adoption of ETFs is a global trend. Global assets in ETFs reached a new high of $5.12 trillion as of 31 July 2018[1], the ever-expanding industry has been increasing at a rate of 19% annually from 2009 to 2017 and the market size is expected to double to over $10 trillion by 2023[2]. As an efficient access to a diversified market with low costs, ETF keeps gathering new assets from investors all over the world.
[1] Investment Company Institute; ETFGI as of August 2018.
[2] BlackRock; Global Business Intelligence, as of May 2018.