The U.S. exchange traded fund market is the largest and fastest-growing in the world, though new research from Cerulli Associates suggests the low-cost investment options are on the cusp of new growth in Europe and other regions of the globe.
The U.S. ETF market holds about $1.8 trillion – more than three times that of Europe's ETF market. But only 32.5 percent of the massive U.S. market (about $4.5 billion) is owned by institutional investors, such as sponsors of defined benefit and defined contribution plans.
Cerulli's research indicates that may be quickly changing, as institutional investors warm to their value and their ability to broadly diversify assets.
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"Costs are coming down not only because of greater competition but also in response to the demands of retail investors using ETFs as strategic core holdings," Barbara Wall, Europe research director at Cerulli Associates, said in a news release.
"Although U.K. advisors have been slow to embrace ETFs post retail distribution review, a growing number are exposed to ETFs through model portfolios. Take-up is also gaining momentum in other European markets, notably Germany and the Netherlands," thanks to favorable regulations.
"The reasons for their popularity are easy to understand," the company's analysts wrote in their October edition of The Cerulli Edge newsletter. "ETFs are a tax-efficient way of offering low-cost diversification, trading and arbitrage options."
Almost three-quarters of ETF providers told Cerulli that institutional adoption will drive growth over the next year. That is a significant jump from 2013, when only 38 percent of providers said institutions are expected to drive growth.
Taxable bond ETFs have attracted the greatest institutional inflows in 2014, garnering 37 percent of assets, while U.S. equity and global equity ETFs have attracted 25 percent and 19 percent, respectively.
"Several providers told Cerulli that there is a heightened interest from institutions to use fixed-income ETFs as a product vehicle over investing in individual bond securities due to the challenges the fixed-income markets are facing," the report said.
ETFs, of course, are listed and traded as equities. Because they are, they offer the advantage of being more liquid than some of the underlying holdings in the funds.
"Unfortunately, institutions' main misconception about ETFs is about their liquidity," wrote the analysts. "The ETF market is highly liquid given that ETFs trade on an exchange. But institutions' concerns around liquidity stem from the illiquidity of ETF's underlying holdings."
As such, Cerulli speculates that ETF providers may have to ramp up their hands-on training for institutional investors.
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Nick Thornton
Nick Thornton is a financial writer covering retirement and health care issues for BenefitsPRO and ALM Media. He greatly enjoys learning from the vast minds in the legal, academic, advisory and money management communities when covering the retirement space. He's also written on international marketing trends, financial institution risk management, defense and energy issues, the restaurant industry in New York City, surfing, cigars, rum, travel, and fishing. When not writing, he's pushing into some land or water.
