ETFs have many fans, but the future of the industry depends on sound marketing.
Better marketing could be the key to future ETF industry growth, according to a new study by Boston-based consultancy Financial Research Corporation, which predicted U.S. ETF assets could nearly triple in the next five years.
While many users have been drawn to ETFs in part because they can be used as strategic as well as tactical tools, investors are increasingly sophisticated, and companies need to better understand their clients to meet their growing demand for downside protection, FRC found.
“In our interviews with industry leaders, we learned that the core/satellite approach has proven to be an effective way to introduce investors to ETFs,” Bob Jenkins, president of FRC, said in a press release outlining the finding of the report, “ETF Trends: Insider Insights on Distribution, Portfolio Construction, Risk & Regulation.”
“As the ETF market continues to expand and becomes more sophisticated, ETF providers are being faced with increasingly complex decisions about their target markets, the fit of their products with the markets, and the effectiveness of both their communication processes and the tools being provided within distribution channels,” Jenkins continued.
The report comes at a time when the ETF industry is still growing rapidly. U.S.-listed assets in the industry now total more than $1.116 trillion, or almost 11 percent higher than they were at the end of last year. Those figures include market movement.
As of the end of the first half, flows into ETFs—which don’t reflect market movement—were more than $58 billion, according to data compiled by IndexUniverse.
More Growth Ahead
The report, which surveyed top executives at 14 ETF firms that account for 93 percent of the U.S. ETF market, found that opportunities for growth still abound across various market segments, in part because the ETF market is still so new.
The first U.S.-listed exchange-traded fund, the SPDR S&P 500 ETF (NYSEArca: SPY) was rolled out in January 1993. It now has more than $93 billion in assets, and it’s only a matter of time before it crosses the $100 billion threshold.
FRC projects that by 2016, ETF assets should hit the $3 trillion, or upward of three times the size of the industry today.
“As we analyzed the approaches of firms in the industry regarding investment situations and channels, we have come to believe that there is room for all types of thinking, from traditional to groundbreaking,” Jenkins said in the release.
“As the industry matures, poor marketing execution can doom otherwise visionary product and distribution concepts,” he added, noting that such strategic failures will become a greater risk as more competitors join the fray.