An exchange-traded fund is a basket of securities such as stocks that tracks an underlying index. An exchange-traded fund is a marketable security meaning it can be bought and sold since the ETF has a price associated with it. ETFs can contain all types of investments including stocks, commodities, or bonds.
Since their introduction only two decades ago, Exchange Traded Funds (ETFs) have been undeniably successful. Growing far beyond their initial function of tracking large liquid indices in developed markets, ETFs now hold over $2.6 trillion of assets globally(BlackRock, ‘ETP Landscape: Industry Highlights’, 30 June 2014). ETFs are listed on an ever growing number of exchanges and are being used by investors in a growing number of markets. New investor segments continue to integrate ETFs into their portfolios and fund sponsors continue to introduce new products.
ETFs will play an increasingly prominent role in the growth of Asset Management (AM) markets, accounting for an increasing proportion of asset flows in many markets and investor segments. ETFs now hold approximately $2.6 trillion of assets globally. Their rapid rise can largely be attributed to the growing acceptance of indexing, but ETFs are likely to get an additional boost in the coming years from greater penetration of global markets, growing acceptance among more types of investors and the introduction of a wider variety of investment strategies.
ETFs are widely expected to continue growing. With more than 5,400 products listed on 60 exchanges by 222 fund sponsors, ETFs are already a global phenomenon. Assets are still heavily concentrated in certain markets, but globalization will continue as ETFs proliferate and address a growing number of niche asset classes, a scenario that has played out in more mature markets and is likely to be repeated in newer markets as well. In absolute terms, asset flows in the developed markets of the U.S. and Europe will dominate the global ETF landscape, but the highest rates of growth are likely to be found in less mature markets.
Asian investors have had access to ETFs for some time, but are only now adopting them in greater numbers. Currently accounting for 7% of global ETF assets, the sheer number of investors in the region combined with economic growth, rapid wealth creation, and a quickly evolving financial services landscape means that Asia is likely to contribute significantly to the growth of ETFs in the coming years. Capital flows will accelerate further with the likely internationalization of the Chinese renminbi, which will open up what will become one of the world’s most important AM markets.