We recently marked the 25th anniversary of the first US listed exchange traded fund: the SPDR® S&P 500® ETF (SPY)……
By James E. Ross, Chairman of the Global SPDR Business
Previously, I looked back at how the “big bang” innovation of SPY changed the investment universe. Today, let’s look ahead to what we think the next 25 years will bring for the ETF industry.
ETFs could reach $25 trillion in AUM by 2025
Globally, ETFs have $4.75 trillion in AUM,1 and we project that ETFs could reach $25 trillion in AUM by the end of 2025. Though this estimate is considerably higher than the industry consensus, we believe that many experts are vastly underestimating the potential for future growth in the ETF market. Much like Moore’s law, which predicts that computing power will double every 18 to 24 months, we foresee a similar growth pattern for ETFs. ETF assets have roughly doubled every three years since 2000 and posted record-breaking inflows in 2017.
Exchange traded products are the world’s fastest-growing investment vehicle and have fundamentally changed the way people invest. Originally designed to be used primarily by trading institutions, ETFs are now utilized to meet a variety of investment challenges: mutual funds use ETFs to deploy innovative cash equitization strategies, sovereign wealth funds turn to ETFs to gain equity market exposure, and wealth management firms rely on ETFs to package their investment beliefs—just to name a few.
Four key drivers of ETF growth
As the costs of ETF investing continue to decline and products become more appealing to a broader set of market participants, we see four key drivers of future growth:
Expansion of retirement accounts. Today, individual retirement accounts (IRAs) hold approximately $3.5 trillion in mutual funds—and that figure is growing as baby boomers retire and leave 401(k) plans in favor of IRAs. There is a strong potential for these investors to increasingly move assets into ETFs.
Adoption by millennials. This age group uses ETFs more than any other. Millennial usage has increased 60% over the last three years alone.2
Untapped global market—particularly the Asian retail market. At the end of 2015, Asian investors owned more than $4.2 trillion in mutual funds, representing a sizeable opportunity for conversion to ETFs.3 And remember, there are more Chinese middle-class citizens than American citizens altogether.
Nearly $6 trillion in insurance company general accounts. Today, only 0.2% of those funds are in ETFs.4 In a favorable regulatory environment, a number of insurance companies could move assets to ETFs.
Our role in the next 25 years
As the ETF industry continues to grow, institutions like State Street Global Advisors play an important role. We’re dedicated to doing our part to ensure all participants in the ETF landscape have the necessary information to make smart, responsible investing decisions. This includes placing a greater emphasis on education and taking a disciplined, rigorous approach to launching new ETFs. As a client-focused organization, we are committed to responsibly evolving to better serve the changing needs of our clients.
In the coming years, institutions like ours can also make a meaningful impact by setting strong standards for governance and responsible investing. For us, this means taking an active role in asset stewardship. Index-based investors, by nature, do not pick and choose what companies we hold. This means we have an obligation—and an opportunity—to engage with those companies and boards and encourage them to focus on long-term risk mitigation. This isn’t only the right thing to do; it’s also the smart thing to do. A long-term focus on value creation helps businesses perform better and benefits our clients. For example, last year we installed the Fearless Girl statue in Manhattan’s Financial District to demonstrate our commitment to gender equality. The statue also started broader conversations around significant environmental, social and governance issues that will leave an enduring impact on company performance.
The future is bright for ETFs. I believe exchange-traded products will continue to be a disruptive—but groundbreaking—force in our industry. So buckle up, and get ready for further extraordinary growth and innovation.
1 Morningstar, as of 12/31/2017
2 Bloomberg Finance L.P., as of 1/13/17
3 “Fitch: China Leads Growth in Asia Mutual-Funds Market,” fitchratings.com, as of 5/17/16
4 “U.S. Institutional Markets 2016: Reassessing Opportunities for Growth Across Multiple Institutional Asset Pools,” Cerulli Associates, as of 2016