Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 230

The imposing trajectory of ETFs

An exchange-traded fund (ETF) is an open-ended managed fund listed on a recognised stock exchange. Investors in ETFs own interests in the pooled assets of a managed fund. Open-ended means the funds continue unless terminated.

EY research survey

EY conducted research into the prospects for ETFs, based on interviews with ETF market makers, service providers and promoters who collectively manage 85% of global ETF assets. The results are available in the report titled Global ETF Research 2017: Reshaping around the investor.

The headline finding is: Global ETF assets which were US$417 billion in 2005, reached US$4.4 trillion by the end of September 2017. That is an imposing cumulative annual growth rate (CAGR) of around 21% per annum.

EY expects the trend to continue. The forecast is a level of US$7.6 trillion by the end of 2020, with between 15-25% of inflows coming from new investors. Two-thirds of respondents believe that most fund managers will have an ETF offering in the next five years.

These growth numbers, incessant already for 12 years, projected for at least another three, should make us ask how and why.

It's undeniable that passive investments are winning market share by securing more inflows than active strategies. Says EY: “There is a growing view that, after costs, very few active strategies consistently outperform index-based investments.”

Initially, ETFs benefited because they provided index replication at a lower cost. According to EY, other trends that have worked in favour of ETFs are the shift to self-directed retirement saving, low yields, regulation, and digital distribution.

However, as unlisted index providers find ways to cut costs, index-based ETFs will also need to trim theirs to stay competitive. EY research suggests that passive funds will exceed active funds by 2027. In the US, says EY, “the ‘shift to passive’ has now been at work for 10 years.” Market participants nevertheless concede that both active and passive strategies can create value. Active houses are now focusing on illiquid assets that ETF providers cannot easily replicate. They are lowering fees or shifting fee structures to a larger performance-based component. Many managers are issuing ETFs themselves, as well as offering innovations such as offering both listed and unlisted classes of capital. Figure 3 from the Report shows passive gaining market share.

Industry response

The positive outlook for ETFs assumes that the industry will be responsive to such challenges.

Most ETFs have been equity based, but even active institutional investors in search of better but stable yields could look toward fixed-income ETFs. “Active investors are even supplementing portfolios of individual issues with bond ETFs in order to quickly capitalise on investment opportunities,” says BlackRock’s Brett Olsen.

The area of socially responsible investment (SRI)-themed ETFs could be primed for growth as demand for environmental, social and governance (ESG)-screened investing increases.

The growing economic engine of Asia also makes it a target. The EY report quotes:

“In Korea, an active equity ETF drew the largest inflows in the first half of 2017, and Hong Kong’s approval of leveraged and inverse (L&I) funds led the number of Asian L&I ETFs to jump from 79 to 163 in the year to September.”

The survey participants stress that the industry must adapt continually to regulation, retail and institutional investors’ needs, and to competition from traditional funds even as their managers embrace the product.

Outlook for Australia

EY’s Antoinette Elias says,

“In Australia, we continue to experience significant growth, with the ETF market capitalisation increasing by 39% in the last 12 months to $33.3 billion as at 31 October 2017. The local ETF market is taking a growing share of the traditional managed funds space and continues to be retail investor driven, rather than institutional.”

Thus, the Australian growth story is no less spectacular than the worldwide trend, although it has started later.

Other research corroborates the EY view, such as the CFA Institute Research Foundation release called, “A Comprehensive Guide to Exchange-Traded Funds (ETFs)”. Their take:

“… on any given day, ETFs typically represent between 25% and 40% of the total dollar volume traded on US exchanges. In short, in just over two decades, these innovative financial products have gone from an afterthought to one of the most important forces shaping how investors invest and how the market itself functions.”

Brief pros and cons for investors

Retail investors need to keep in mind the essential pros and cons of ETFs, including:

Pros

  1. Investors can usually buy and sell an ETF on an exchange at very close to the Net Asset Value, often at a cheaper cost than unlisted managed funds.
  2. Through ETFs, retail investors can access investment strategies normally reserved for large or institutional investors, such as shorting, long/short bullion or commodity prices, and other riskier investments.
  3. Investors can sometimes short an ETF, thereby creating the inverse outcome of the ETF itself.
  4. ETFs make it feasible to get exposure to multiple overseas markets and complex investment strategies with a relatively small amount of money.

Cons

  1. Having an instrument listed is no guarantee of sufficient liquidity, such as where the market in the underlying securities is disrupted (high yield bonds are a good candidate). Exits could be harder, or costlier, than from a managed fund during volatile market conditions.
  2. Set rules define and calculate repurchase values in managed funds, but ETF share values depend on market sentiment and the activities of market makers.
  3. An ETF does not make the underlying investment any less risky. Some retail investors may lose sight of this.

It’s the last of the cons that is worth repeating. Listing an asset class does not change its investment outcomes.

 

Vinay Kolhatkar is a freelance journalist, novelist, and finance professional. This article is for general information and does not consider the circumstances of any investor.

 

  •   7 December 2017
  • 2
  •      
  •   

RELATED ARTICLES

ETF investors adding to portfolios during recent volatility

Building a lazy ETF portfolio in 2026

Passive ETF investors may be in for a rude shock

banner

Most viewed in recent weeks

Want your loved ones to inherit your super? You can’t afford to skip this one step

One in five Australians die before retirement and most have not set up their super properly so their loved ones can benefit from all their hard work and savings. 

Super is catching up, but ageing is a triple-threat

An ageing Australia is shifting the superannuation system’s focus from accumulation to the lifecycle of retirement. While these pressures have been anticipated for decades, they are now converging at scale and driving widespread industry change.

Has Australia wasted the last 30 years?

The 20 years after Peter Costello left Treasury have been deemed wasted...by Peter Costello. The missed opportunities for Australia began long before.  

The 5% deposit scheme is bad for homeowners and Australia

An ‘affordability’ scheme making the county more vulnerable to economic shocks and contributing to the deteriorating financial situation of everyday Australians.

3 ways to defuse intergenerational anger

With the upcoming budget increasingly likely to include bold proposals to alter the tax code I’ve outlined three incremental steps with fewer unintended consequences.

Navigating the next stage of life in retirement

Retirement planning is more than just saving enough money. Long-term care needs, housing choices, and social networks are just as critical for a happy and enjoyable life.

Latest Updates

Superannuation

Indexation implications – key changes to 2026/27 super thresholds

Stay on top of the latest changes to superannuation rates and thresholds for 2026, including increases to transfer balance cap, concessional contributions cap, and non-concessional contributions cap.

Economy

Central banks need higher inflation targets

In a shift away from solely targeting low inflation, central banks are considering raising inflation targets to combat economic challenges, but face potential drawbacks and conflicts in policy implementation.

Exchange traded products

The missing 30%: how LIC returns are understated, and why it matters

The perceived underperformance of LICs compared to ETFs is due to existing comparison data excluding crucial information, highlighting the need for proper assessment and transparent reporting.

Latest from Morningstar

Alpha isn’t dead. You’ve just been measuring it wrong

New research shows smarter portfolio construction—not new factors—is the real edge in the hunt for alpha. However, finding it requires a fundamentally different mindset.

Investment strategies

The diversification illusion: why 'balanced' portfolios may be exposed

Many 'diversified' portfolios are increasingly driven by the same narrow set of forces. As concentration builds beneath the surface, understanding how portfolios behave - not just how they’re constructed - is critical for investors.

Investment strategies

The case for staying the course in credit

Current market volatility is likened to Lenin's quote on rapid change. Rising oil prices and interest rates impact bond and corporate yields, with a potential economic downturn ahead. Maintaining interest rate duration is advised.

Investment strategies

One risk after another

Investors often focus on front-of-mind risks, reacting to each headline event without considering long-term impacts. Cass Sunstein and Timur Kuran define this as an "availability cascade," affecting financial decision-making.

Sponsors

Alliances

© 2026 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.