Global ETF Industry Enters its Next Phase of Development
LONDON, UK, August 6, 2012 -- Global ETF assets under management (AUM) have doubled in the last five years, as has the number of products available. While growth in the more mature ETF markets is likely to slow in the medium term, new products will continue to be added to an increasingly diverse and sophisticated ETF line-up.
In Asia, the buzz has been about the development of RMB ETFs outside of mainland China. In February, the Hang Seng RMB Gold ETF became the first ETF to be traded in RMB on the Hong Kong stock exchange. More RMB ETF products are in the pipeline, but so far no foreign groups (notwithstanding Deutsche Banks's connection with Harvest Fund Management) have been allowed to launch RMB ETFs outside of China. Cerulli sees this as an opportunity waiting to be realized.
"Plenty of foreign managers have launched Dim Sum funds," said Barbara Wall, a Director at Cerulli Associates. "In the future, there is no reason why we shouldn't see RMB ETFs based on those products."
"Also, as RMB increasingly circulates in markets outside China, we could expect RMB ETFs to be launched in these locations too," she added.
Meanwhile, in Europe and the United States there is growing concern about the number of sub-scale funds. Cerulli estimates that one- quarter of all ETFs face the chop. In theory, dominant worldwide brands should be able to keep costs low and impede local players from grabbing marketshare, but that isn't always the case. Even the big names cannot afford to rest on their laurels.
Vanguard's entry into Europe has been described as a potential game changer for the ETF industry in the region. Those managers that cannot compete on cost grounds may have to re-evaluate their business model. For smaller players, specialization is the name of the game.
One sub-sector of the ETF industry that has yet to reach its full potential is active management. Cerulli's U.S. ETF Sponsor's Survey indicated that 57% of respondents believe that active ETFs will have increased but limited success in the market. One of the most significant hurdles is inherent in the product itself. A full 86% of sponsors surveyed by Cerulli rated transparency either a moderate or significant hurdle for active ETF development.
Despite the brickbats thrown at active ETFs, their time will come. All eyes are on Pimco's Total Return Bond ETF, which was launched on March 1, and has already reached US$2 billion in net assets. If the fund continues to deliver solid performance, this could be a potential game changer for the active ETF industry.
Other findings:
- To be a successful ETF player, products must be accurately targeted to meet specific needs. The proliferation of indices makes finding potentially interesting products easy, but there is more to development than sticking a pin in a list of available composites.
- Cannibalization is less of an issue for groups offering active, tracker, and ETF solutions than might be assumed. Each product has its own merits. Some investors need intra-day trading; others have longer horizons that may be better suited to tracker mutual funds.
- Customized beta is expensive, it offers less economies of scale. Providers want to know that there will be a broader move into the asset class before they commit. Other managers that have already launched products believe this is short-sighted, that the time to raise their profile is now, before the market becomes saturated and investors go elsewhere.
About Cerulli Associates
Headquartered in Boston with offices in London and Singapore, Cerulli Associates provides financial institutions with guidance in strategic positioning and new business development. Our analysts blend industry knowledge, original research, and data analysis to bring perspective to current market conditions and forecasts for future developments.
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