The ETF industry has come a long way in 23 years, and indications are that it's only going to get bigger — a lot bigger.
If projections from a PwC survey released this week hold up, assets for exchange-traded funds will nearly triple in the U.S. and more than double globally over the next five years. That comes after a decade of rapid expansion for an industry that has benefited from low costs and an ever-increasing array of new products in hot demand by institutional investors, and increasingly by the retail crowd as well.
The survey of more than 60 firms in 2015 showed that global ETF assets likely are going to jump from $3 trillion to $8.2 trillion, with the U.S. portion of those assets moving from $2.3 trillion to at least $6.2 trillion by 2021.
"As investors get further educated on the product and how to use it and find different ways to use it, it's only going to help growth. There's a reasonable possibility those projections will be achieved," Bill Donahue, managing director with PwC's Asset Management Assurance Practice, said in an interview. "A number of folks we talked to were even more bullish on the growth opportunities."
ETFs are funds that trade like stocks but track indexes like the S&P 500 and various sectors, as well as multiple facets of the bond and commodities markets. They come in plain-vanilla forms, like the SPDR S&P 500 ETF Trust that tracks the broad index, as well as exotic offerings like double- and triple-leveraged funds that generate amplified returns from gains and losses in particular asset classes.
Though the $13.2 trillion mutual fund industry still dominates ETFs in asset size, the two industries are moving in opposite directions. Mutual funds, which are mostly actively managed and trade only after market hours, have actually seen a 3.6 percent decline in assets under management over the past 12 months, according to the Investment Company Institute. ETFs have grown 4.1 percent during the period.
Reasons typically cited for the industry's growth include low costs — fees are generally a fraction of what mutual funds charge — as well as tax advantages and liquidity.
However, the PwC survey found those factors to be significant but secondary:
"We were surprised related to the low-cost consideration. It's hard to go a day without seeing some firm lowering their fees to be competitive," Donahue said. "While tax efficiency is certainly a consideration, people obviously are refocusing on performance more so."