Last updated: 21:48 / Monday, 6 October 2014
Cerulli's report

ETF Markets: The Only Way is Up

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ETF Markets: The Only Way is Up
  • There are signs that European ETFs are on the cusp of a new phase of growth, particularly in the retail market, driven by influential new entrants and a favorable regulatory climate
  • The smart beta bandwagon is also gathering pace amid growing demand for innovative passive investment strategies
  • "The advantages of ETFs are beginning to be felt in South America and Asia"
  • Mexico is home to the largest locally domiciled ETF market in Latin America with one-half of the region's listed ETFs

With assets under management (AUM) of US$1.8 trillion the U.S. market for exchange-traded funds (ETFs) is more than three times that of Europe, and is growing at a faster rate. But there are signs that European ETFs are on the cusp of a new phase of growth, particularly in the retail market, driven by influential new entrants and a favorable regulatory climate, according to the October issue of The Cerulli Edge-Global Edition.

"Costs are coming down not only because of greater competition but also in response to the demands of retail investors using ETFs as strategic core holdings," says Barbara Wall, Europe research director at Cerulli Associates.

"Although U.K. advisors have been slow to embrace ETFs post retail distribution review, a growing number are exposed to ETFs through model portfolios. Take-up is also gaining momentum in other European markets, notably Germany and the Netherlands. The shift will be given a significant boost by the Markets in Financial Instruments Directive."

The smart beta bandwagon is also gathering pace amid growing demand for innovative passive investment strategies. Last year, ETFs employing smart beta approaches grew by 59% in the United States, and accounted for more than one-third of cash inflows into the asset class. Value and dividend strategies were popular with investors and advisors, accounting for 56.6% of U.S. smart beta exchange-traded products, while growth products account for a 21.7% marketshare.

"The advantages of ETFs are beginning to be felt in South America and Asia," notes Angelos Gousios, a senior Cerulli analyst. "Exposure to China through Renminbi Qualified Foreign Institutional Investor (RQFII) ETFs has exploded since their launch just over two years ago, and allocations to cross-border ETFs by Latin American pension funds have grown on average 35% annually for the past four years, and are catching up with allocations to cross-border mutual funds."

In LatAm, Mexico is home to the largest locally domiciled ETF market in Latin America with one-half of the region's listed ETFs, and assets of US$6.2 billion, or almost two-thirds of the region's total. Almost 60% of these funds are dedicated to equity strategies with the majority focused on the domestic market. The rest are fixed income.

In China, the market for RQFII ETFs appears to be thriving. The first was launched more than two years ago, but 16 are now trading on the Hong Kong stock exchange, and several more have been listed in New York and London. Cerulli believes that the RQFII ETF space will continue to gain traction as demand for exposure to China grows, and the RQFII program is likely to continue to be developed by the Chinese authorities as they strive to internationalize the renminbi.

Growth in USA

Cerulli estimates that 32.5% of ETF assets in the United States--which should surpass US$4.5 billion in 2015--are owned by U.S. institutions. Almost three-quarters (70%) of ETF providers say increased institutional adoption will be a major driver of growth over the next 12 months, which is a significant jump from 2013, when the figure was just 38%.

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