10 February 2015

SEI: Six trends shaping the next generation of exchange-traded funds

After two decades of explosive growth, exchange-traded funds (ETFs) are firmly entrenched in the asset management landscape. ETFs are not only growing, but also rapidly evolving as new product types and marketing approaches emerge. And they continue to broaden their reach as they penetrate new investor segments, distribution channels and geographic markets.

Six key market trends are shaping and fueling the opportunity in ETFs:

• Active ETFs—As regulators address major transparency issues, active ETFs are finally moving from concept to reality
• Ongoing convergence—The mutual fund and ETF worlds increasingly intersect as new types of ETFs emerge, investment organizations look to package their strategies in a variety of ways, and investors build portfolios using both structures side by side
• Widening appeal—Institutions and hedge funds were early ETF adopters, followed by advisors and intermediaries; retail investors are the next big wave
• Strategists and robo-advisors—New players are altering the ETF distribution landscape, creating new business models and shifting the economics of the business
• Marketing through education—As ETFs go mainstream and evolve into different forms, it becomes even more important that investors understand how—and how not—to use them. New distribution structures will further expand educational needs
• Global opportunity—Adoption is accelerating outside the US, especially in Europe, where ETFs are rebounding after a slow period, and in Asia, where some long-standing barriers are coming down

ETF sponsors live in a world of daily, real-time data management, in which portfolio holdings must be continually updated. Passive ETF managers who expand into active funds must deal with some escalation in operating demands, such as the need to rebalance daily rather than quarterly. For active mutual fund managers who want to move into the ETF world, the operational differences and challenges are far greater. In both cases, it’s critical to have an operating platform that can smoothly handle the order-taking, daily accounting and basket data capabilities that ETFs demand.

Full analysis on SEI

© SEI