Exchange-traded funds (ETF) are becoming the product of choice for a growing number of retail clients and financial advisors around the world, according to Deborah Fuhr, managing partner with ETFGI LLP
Speaking at the 2014 Exchange Traded Forum, hosted by Radius Financial Education in Toronto on Monday, Fuhr said ETF assets under management (AUM) are likely to surpass alternative management strategies and services, like hedge funds.
“Hedge funds and fund of funds are not forecast to grow quickly this year,” said Fuhr. “[We’re] likely to see the ETF industry in terms of assets surpass the hedge fund industry.”
Currently, hedge funds hold US$2.5 trillion in AUM across 8,000 funds, according to Fuhr. Meanwhile, ETFs had US$2.4 trillion in AUM at the end of 2013. Fuhr predicts that AUM held by the ETF industry will increase by 20% to 25% on a compound annual growth basis over the next five years.
Looking specifically at the U.S., the sales tactics of companies such as San Francisco-based Charles Schwab Corp. are one of the big drivers of growth in ETFs. Charles Schwab, along with TD Ameritrade Corp. in Omaha and Fidelity Investments in Boston, offer free ETF trading to clients on their online platforms, said Fuhr, in the hopes of future selling opportunities.
“The challenge is getting people to open an account,” said Fuhr. “Once the account is there you can talk to them, you can cross sell.” For instance, the client may buy individual stocks or might have funds to rollover into an IRA.
“This is increasingly happening, it’s starting to happen in other markets,” she said, “and this just shows that ETFs are being embraced by retail and also by financial advisors.”
As well, ETFs are picking up traction in Europe due to regulatory changes. The ban on embedded trailing commissions in the United Kingdom means financial advisors and their firms are offering clients different services and product solutions. For instance, many firms are now building risk profiles of their clients and offering packaged solutions — which often consist of ETFs — that fall within those parameters, said Fuhr.
Furthermore, there is a growing segment of affluent retail clients in Europe who are not interested in paying for advice when they never had to before, according to Fuhr. As such, many of these investors are turning to platforms offering model portfolios that can be updated by them or — for a higher fee — be rebalanced automatically.
“It is interesting to watch the changes,” she said. “ETFs as a percent of the global mutual fund industry is pretty small but it has been growing and it continues to grow.”