Deborah Fuhr, managing partner of consultancy ETFGI, has predicted that assets under management in exchange-traded funds listed in Europe will reach  $2.8 trillion in ten years, up from $499bn at the end of June.

Fuhr spoke at ETF event on Liquidity & Investment Trends hosted by Bloomberg in London last week. She said: “In Europe ETF assets will hit $1.1 trillion by 2020 and $2.8 trillion by 2025.”

In the first half of this year a record $40bn in net new assets was gathered by ETFs and ETPs listed in Europe, beating the prior record of $32bn, according to ETFGI’s preliminary ETF and ETP global insights report. As a result total assets rose to $499bn.

“Global ETF assets will reach $7 trillion by 2020 and $17 trillion by 2025,” added Fuhr.

In the US in the first half of this year, ETFs and ETPs also gathered a record $103bn in net new assets to take total assets under management to $2.1 trillion.

As a result assets in the global ETF/ETP industry overtook assets in global hedge funds for the first time at the end of June this year.  Fuhr said $2.971 trillion was invested in the ETFs/ETPs listed globally at the end of the second quarter – while assets in the global hedge fund industry at the end of June were $2.969 trillion.

Hector McNeil, chef executive of WisdomTree Europe, said at the Bloomberg event that there is no reason why European ETF assets cannot grow to the same level as in the US, and in a quicker timeframe.

“The ETF wrapper is one of the most democratic by allowing all investors access to the same product around the world,” McNeil added. “ETFs are now 13% to 14% of mutual funds in the US, and can reach 50%, and mutual funds will need to adopt some of the characteristics of ETFs to keep up.”

The growth prospects of the ETF market are attracting new asset managers who have traditionally been in active funds

“All asset managers are thinking through their ETF strategies,” added Fuhr. “Some will be assemblers who build portfolios using ETFs, which includes robo-advisers. Europe does not have a dominant robo-adviser so that presents a big opportunity.”

In the first half of this year, equity ETFs/ETPs gathered the largest global net inflows of $101.7bn, followed by fixed income with $35.4bn, and then commodities with $4.2bn.

Famed investor Carl Icahn criticised fixed income ETFs this month at the  CNBC Institutional Investor Delivering Alpha Conference in New York.  He argued they are very dangerous in securities such as high-yield bonds which will be illiquid when interest rates rise.

Laurence Fink, chief executive of BlackRock disagreed with Icahn and said ETFs create price transparency as they are listed on exchanges and trade continuously, according to Bloomberg.

Antoine Lesne, head of ETF sales strategy for EMEA at State Street Global Advisors, argued that one of the advantages of the ETF market is the presence of a market marker.

“Although spreads might widen, investors will always have a trading price as long as it quoted,” Lesne added. “The Icahn comments shows that it is important to understand how an index and a fund are constructed but an ETF is not more risky than other exposures like mutual funds be they active or passive.”

Lesne took part in a panel on the use of ETFs as an investment tool at the event hosted by Bloomberg in London last week.

Chris Mellor, executive director, equities product management at Source UK Services spoke on the same panel and said fixed income ETFs need to look at benchmarks other than the standard market capitalisation indices which may be heavily invested in the riskiest bonds.

“Using a more intelligent approach such as GDP-weighted indices, goes some way to improve this. It could be argued that active ETFs may offer more value in fixed income than in equities,” Mellor added.

One of the growth areas in the ETF market is expected to be smart beta ETFs, which do not follow standard market-cap weighted indices, but track other investment factors such as dividend yields.

Mellor said: “The next development in smart beta ETFs will be those that use a combination of factors and Source has issued two Goldman Sachs Equity Factor Index products which are multi-factor. Smart beta products will become more targeted and the product needs to be transparent and open about its exposures.”

McNeil said the WisdomTree currency-hedged equity funds focused on Japan and Europe have gathered approximately $40bn in assets under management and provided solutions to investors which enabled them to replace their core exposures. “The debate is shifting from who has the cheapest ETF to who has got the best fund after costs,” he said.

Featured image via Redindie/Dollar Photo Club