The extraordinary success that ETFs saw in 2017 will be hard to improve upon, but from 50,000 feet, as one takes the pulse of the passive investments landscape, it is quite likely that ETFs will continue to dominate the headlines for some time to come. During 2017, over US$600 billion of net new assets poured into equity and fixed income ETFs, albeit with the lion’s share of that business happening in the US. Likewise, Asia and Europe also fared relatively well with net new ETF assets of US$45 billion and US$95 billion respectively.
As the ETF industry celebrates its 25th year, in the US the long tail of the full spectrum of new funds that continually seem to get launched must surely be under pressure once one realises that the top three providers of ETFs – BlackRock, Vanguard and State Street – account for a combined market share of more than 75%.
Yet somewhat surprisingly, it feels like the strong growth phase for ETFs in Europe and in Asia has barely started. After what must count as one of the longest periods of regulatory anticipation, MIFID II is finally up and running in Europe, and early indications suggest this new legislation, designed to favor transparency and protect end investors, is likely to increase the take up of ETFs.
These new regulations are forcing brokers to report trading volumes, and as a direct consequence published volumes have increased as has the apparent level of liquidity. Gone are the days when one simply didn’t know how deep the ETF market was in Europe. While this boost to confidence has been well received it is the regulation regarding the visibility of management fees and trading costs incurred while managing a fund that is most likely to tip the balance in favor of passive investing.
Of course, it is too early to tell if this will change advisors’ fund selection habits, but initial indications have seen the impact on active managers as they are forced to publish the costs incurred while managing their portfolios, and it isn’t pretty. Let’s not forget the arrival of what was once considered a pipedream of a Pan-European “Single Tape” for ETF Volumes in Europe is a game changer and could seriously move the goalposts for the European fund management industry.
In Asia, the picture surrounding ETF growth is somewhat different. There are instances of funds being de-listed in Hong Kong, partly due to the delay of the ETF Connect program with China. Should one be surprised, maybe, but almost certainly this will be a short-lived phase as the economics of the fee compression that is sweeping across the industry knows no boundaries. As more and more firms in mainland China and beyond look to step up to the opportunity that ETFs afford them to scale up their business, then one can only imagine there will be no turning back.