Friday, November 13, 2015

2015 EY ETF survey - Continued growth through innovation

Will the growth expectations for ETF's ever slow? The 2015 EY ETF survey says that growth will average 18 percent for the next three to five year. This exceptional growth means that it will further cannibalize the mutual fund market for retail investors and traditional money managers for the institutional market. This growth is not going to be driven by passive investments but a greater push for innovation in fund products. The EY survey says that the big product push will be in enhanced beta and currency hedged funds and not jut passive and pure active ETF's.

This push toward innovation has real implications for active mutual fund managers who have been closet enhanced beta managers and hedge fund alpha managers who have used enhanced beta as a technique to generate alpha versus traditional benchmarks. The focus on innovation will continue to make ETF's  a disruptive force in money management. With ease of packaging and distribution, new ideas can be quickly released into the market. Innovation will force managers to work harder and cause further firm consolidation and declines in fees. 

While the survey suggests strong growth, the global ETF market seems to be fractionalized. Europe is different than the US and Asia follows its one rules. What seems to be missing from the growth expectations is the realization that for these products to be successfully sold, there will have to be much more education of investors. I am skeptical whether growth can be achieved without more basic education on the differences in products. However, the mutual fund and hedge fund businesses seem to have been slow at combating the growth of new ETF product. This will be a big industry battle in 2016.

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