What can we expect from the rise in ETFs?

What do investors and asset managers need to look out for?

In June, the Financial Times reported that the exchanged-traded funds (ETFs) industry was headed for a consecutive year of record highs as inflows into ETFs totalled $659bn in the first six months of 2021 compared with $767bn for all of last year, according to ETFGI.

Growth in electric vehicles, agritech,cybersecurity,digital currency and other tech-related ETFs are unlikely to be slowing down anytime soon, as the past decade witnessed the rise of social media, cloud computing and artificial intelligence driving transformation in our daily lives. iPads, fitness trackers, wireless devices, electric cars, and a networking shift from 3G to 5G were among the few major turning points.

Daily time spent online increased to 220 minutes in 2021 from pre-pandemic 132 minutes in 2019. Work-from-home, online-schooling, telehealth and e-commerce is here to stay, and there is still room for growth for advances in technology and data analytics. Simultaneously, technology is also given the major role in solving global problems such as food security,semiconductor chip shortages, demand for renewable energy, data-security. Investors are all looking to capitalise off the world’s growing reliance on technology, and in turn, amp up the competition amongst asset managers.

Increased competition amongst asset managers have numerous effects, namely the risk of an overcrowded market. Investopedia stated there are 7,602 ETFs globally in 2020, an increase from 276 in 2003, and 297 ETFs were shuttered despite strong inflows. In an overcrowded market, asset managers will need to focus on distribution channels,accessibility, promotion of investor education in order to reach a bigger proportion of new prospective investors. To complement that, impactful marketing strategies from asset managers will also be necessary.Creating shareable content such as infographics and videos with bold branding helps attract prospective investors. Corporate brand was deemed to be the most important factor in raising assets, with 60% of survey participants rating it very important in 2020. In order to gain a competitive edge, marketing with a focus on building long-term consumer relationships, addressing their concerns about sustainability and how regulatory changes will impact investors will help facilitate trust.

The European Central Bank reported that ETFs are also increasingly used as collateral and in securities lending transactions, as well as by some institutional investors for liquidity management purposes,suggesting a need for close monitoring from a financial stability and regulatory perspective. The prospective interactions of ETFs with other parts of the financial system could potentially amplify risks, depending on the liquidity relative to the underlying securities of the ETFs.We can anticipate regulatory changes, whether it is investor protection oriented or lawful competition.

The growing presence of robo-advisors in the market is making trading cheaper and more accessible, and it is a double-edged sword.It is beneficial to investors with pre-existing knowledge of the market and want to take strong positions based on their convictions. However, some investors need a safeguard, namely those who are easily misled or prone to overuse margin trading or leveraged products. The inexpensiveness of ETFs magnifies the impact that investors have on the market, whether good or bad.

Regulators may witness more collaboration between asset managers in the industry, be it through launching ETFs together or mergers and acquisitions. Mergers and acquisitions that can lead to a market that is disadvantageous to consumers because they could be harmful to competition. Mergers that involve dominant asset managers, could potentially turn a competitive market into one that is not.

It will be a challenge for regulators to balance investor protection while ensuring asset managers have the right to continue doing their business. Regulators across the world should focus on data collection to closely study the effect that ETFs with foreign exposure have on their respective underlying markets and create new regulations accordingly. For investor protection, there needs to be an increase in disclosures for ETFs for ordinary retail investors rather then preventing participation. Disclosure of risks should be easy to understand for all exchange traded products to spell out exactly what can go wrong.