Schwab Report Predicts Strong Growth In ETFs Over Coming Years

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The growing popularity of exchange-traded funds (ETFs) over the years is no secret, with the investment vehicles swelling to become a $2 trillion industry this April. As a preferred passive investment product that caters to the demand of retail and institutional investors alike, ETFs have become an integral part of any investor’s portfolio. And going by the results of a recent investor study conducted by brokerage giant Charles Schwab (NYSE:SCHW), ETFs are set to capture a larger share of investors’ portfolios over coming years. [1]

The biggest takeaway from the Schwab study is that half of the respondents are looking to increase their ETF holdings over the year to come. Assuming these findings apply to the industry as a whole, this translates to billions in new inflows into ETFs in the near future. Besides Charles Schwab, which is a notable player in the ETF industry, this could be good news for global asset management giants like BlackRock (NYSE:BLK), State Street (NYSE:STT) and Vanguard, who owe a significant chunk of their value to their ETF offerings.

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The ETF market has grown to its current formidable size by providing investors a cheap and convenient way to put their money into fixed income, equity, currency, commodities and other investment markets. And while there is no doubt about the enormous potential that still exists in the industry, the Schwab study helps put a figure to the recent growth as well as the growth that can be expected in the near future.

The 2013 ETF Investor Study is the third installment of the online survey by the brokerage firm, and saw responses from 1,000 individual investors aged between 25-75 with investable assets of at least $25,000. The survey shows that roughly 9% of the respondents had invested more than half of their assets in ETFs – a notable growth from the 4% figure for 2012. More importantly, half of the respondents estimated that they will be increasing their investments in ETFs over the next year – a 22% increase from last year. As investors look to direct more of their cash towards ETFs, we expect faster growth in the total assets managed by ETF providers – especially BlackRock, State Street and Vanguard, who have a market share of roughly 40%, 17% and 13% respectively.

ETF Growth Should Benefit Asset Managers

While we believe that the growing interest in ETFs will result in a net improvement in fee revenues for these firms over coming years, the amount of growth in the fees will depend on the manner in which investors move to the vehicles. This is because investors interested in ETFs will either move some of their existing investments in actively or passively managed funds to an ETF, or will move new funds into ETFs. The latter is obviously the best case scenario as far as the asset managers are concerned, as it also means an increase in their total assets under management and a corresponding increase in revenues. However, if existing customers switch to ETFs from other conventional funds provided by the asset managers, this could actually result in a slight decrease in fees, as ETFs command lower fees than actively managed funds (though they are higher than passively managed ones).

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Notes:
  1. Schwab Study Finds 22% Rise in Demand for ETFs, Schwab Press Releases, Oct 3 2013 []
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