ETFs To Ride Passive's Rise To $7.6 Trillion In Assets By 2020

As passive investing eclipses active investing, ETFs will almost certainly reap some of the benefits -- but the ETF industry might not explode in size or success.

Nevertheless, the ETF industry will continue to boom over the next three years to reach $7.6 trillion in assets by the end of 2020, according to a recent report from London-based Ernst & Young (EY), with RIAs driving much of the growth.

After the ETF market grew at a cumulative average growth rate of 21 percent, from $417 billion at the end of 2005 to an estimated $4.4 trillion at the end of September 2017, the authors of EY’s recently published Global ETF Survey are projecting that ETF assets will grow at a 15 percent annual rate through the next three to five years, driven by the shift to passive investing, the current size of the ETF market relative to the overall market, and ETFs' suitability for digital distribution.

In the year ending Sept. 30, 2017, RIAs were the largest contributors of net flows into ETFs, investing $132 billion in assets in the products. Moving forward, new investors will account for between 15 and 25 percent of ETF inflows over the next three years, according to EY, up to $250 billion in new assets.

EY estimates that passive products currently account for 24 percent of all global fund AUM. By 2020, the report’s authors project that passive funds will account 31 percent of all global fund assets, and suggest that “passive AUM could exceed active AUM by 2027.”

Yet passive investing’s eventual dominance may not come hand-in-hand with the ascent of ETFs over mutual funds, according to the report’s authors. As the lines between ETFs and mutual funds are blurred, and investors determine whether or not they need the daily liquidity of an ETF, much of the shift to passive products may end up adding AUM to index-tracking mutual funds rather than ETFs.

EY identified three drivers of ETF product proliferation: The untapped appeal of fixed income ETFs; the growth of smart beta, thematic and locally listed equity ETFs, and the development of active and alternative products within traditional and non-transparent ETF product wrappers.

For its research, EY conducted surveys and interviews between May and September 2017 among 70 leading ETF managers and market makers globally, accounting for approximately 85 percent of the ETF AUM.