Assets in ETFs and other indexed products will reach $10.4 trillion by 2017, up more than 100% since 2011, a new report from Tiburon Strategic Advisors predicts. In that same time period, those assets are seen increasing from a 7% to a 25% share of total world equity market capitalization while net flows rise by almost 100%, to $665 billion.
Chip Roame, Tiburon’s managing partner, said there are a "host of reasons” for this upbeat assessment.
“Active managers are unable to consistently beat the market,” he said, “while index managers offer lower costs and better tax efficiency. ETFs themselves have even more benefits.” Those include intra-day trading, portfolio transparency, the ability to use margin and to go short.
“ETFs are becoming widely utilized for a host of investment management strategies, including sector rotation and tactical asset allocation,” Roame said. “ETFs will absolutely explode in growth when they get into 401(k) plans,” which he termed “the last holdout of positive mutual fund flows.”
Tiburon also predicted that personalized indexing will grow to $33 billion by 2017.
“Personalized indexing is adapting an index specifically for sophisticated investors who need a slight tweak for themselves,” Roame said. “The CEO of a major corporation might say, ‘Build me an S&P 500 index excluding exposure to my industry because I have enough of that risk in my job.’”
According to Tiburon, assets in indexed products will increasingly come from independent advisors.
“RIAs will boost their use of ETFs substantially in coming years (it is now about 6%) because they want to charge fees on the accounts,” Roame said. “The RIA channel is the most fiduciary-minded of the advisory channels so RIAs will look for the lowest-cost products to put inside their fee accounts. The largest RIAs have long been big users of index mutual funds.”
The report also indicated that actively managed ETFs will continue to need to work to gain acceptance with financial advisors.
“We have mixed views on the future of active ETFs,” Roame said. “The ETF structure is superior to the ‘40 Act structure so active ETFs will likely take hold eventually. They offer investors transparency and lower costs.”
Nevertheless, Roame said, active ETFs face obstacles.
“Some managers don't want transparency so many top performers will resist participating,” he said. “New actively-managed products will launch with no track records, and many advisors sit back and wait for three to five years before investing in a new fund.” If advisors adopt active ETFs more rapidly, such funds may soon play a more prominent role in clients’