The global market for exchange-traded funds (ETFs) will more than double over the next four years, as investors look to capitalize on broad diversification and deep liquidity in an increasingly uncertain financial environment. The bulk of that activity will be concentrated in North America, creating fierce competition among ETF firms looking to differentiate themselves from an increasingly crowded market.
By the end of 2015, global ETF assets under management (AUM) reached $2.959 trillion, according to PricewaterhouseCoopers. That represents a gain of 102% over the last five years. The market is expected to top US$7 trillion by 2021, with North America accounting for roughly 84% of total AUM. The European market is also expected to expand rapidly over the next four years to reach $US1.6 trillion by 2021.
Investors are flooding the ETF market for its apparent advantages over traditional open-ended funds. ETFs provide greater transparency, better tax efficiency and more flexible trading conditions than mutual funds and other investment classes. ETFs also offer broad coverage, which allows investors to buy large sections of the market or diversify across many different sectors in a highly efficient manner. This combination has made ETFs a key driver of retirement planning and wealth generation for investors throughout the world.
Despite these advantages, the rapid of uptake of ETFs isn’t without its drawbacks. By the end of 2015, there were well over 4,000 ETFs available on the market, placing a bigger premium on due diligence and investor education. With many more ETFs in development, navigating this complex environment can be a daunting task for passive investors or new entrants into the market.
The industry is also undergoing rapid change as successful ETF issuers embrace emerging technologies in the form of big data, artificial intelligence and social media. This has led to the growth of robo-advisors, which provide portfolio management solutions through custom software and complex algorithms. Like the name implies, robo-advisors operate with minimal or no human supervision.
Although ETFs are generally considered to be safer alternatives to other asset classes, a certain segment of the market carries greater risk. In 2015, the U.S. Securities and Exchange Commission (SEC) sought to address those risks by introducing reforms related to derivative and leverage products. Certain ETFs are double or triple leveraged, while others offer double or triple inverse exposure. Although these assets can lead to returns that are double or triple the tracked index, they can also trigger losses of the same magnitude.
ETFs, like other asset classes, offer a blend of opportunity and risk that investors must carefully weigh before entering the market. The growth and widespread adoption of ETFs since their inception in 1993 suggests the market will remain in expansion mode for the foreseeable future. This trend is expected to intensify thanks to globalization, technological innovation and increased volatility in the financial markets.
 PricewaterhouseCoopers (2016). ETFs: A roadmap to growth.
 Fidelity Investments. Benefits of ETFs.
 Statista. Number of Exchange-Traded Funds (ETFs) worldwide from 2003 to 2015.
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