Regulation and fees may add $1tn to US ETF AUM by end 2018: PwC
Exchange-traded funds (ETFs) are attracting billions of dollars of investment, as investors opt for them over mutual funds. US ETF assets could reach $3.6tn by the end of next year, predicts Nigel Brashaw, a partner at PwC, up 46% on current assets of $2.4tn. For comparative purposes, assets in US mutual funds are stated at around $12.53tn. It is suggested the adoption of ETFs could be accelerated by the US Labor Department's "fiduciary rule" coming into play in April, which states advisers and brokers must not recommend investment that "may not be the cheapest or best option" for clients. 

The move to ETFs is nowhere near over.

Exchange-traded funds have long been one of the hottest items on Wall Street, with investors pouring billions of dollars into them in recent years, favoring them over mutual funds in what is amounting to a massive industry upheaval. What’s more, the shift may only be gaining steam.

Nigel Brashaw, a partner at PricewaterhouseCoopers, estimated that U.S. ETF assets could hit $3.6 trillion by the end of 2018. That would mean inflows of about $1.1 trillion, representing growth of 46% from current U.S. assets of $2.465 trillion. (About $3.4 trillion were held in global ETF assets at the end of last year, according to data from ETFGI, an ETF research firm.

Over the course of 2016, about $291.5 billion flowed into U.S. ETFs, while $128 billion was withdrawn from mutual funds. Despite that, mutual funds continue to have a sizable lead in assets, with $12.53 trillion.

The acceleration in ETF adoption coincides with the Labor Department’s “fiduciary rule,” which requires that the financial advisers and brokers who handle individual retirement and 401(k) accounts must act in the best interest of their clients, rather than recommending investments that may not be the cheapest or best options. Many expect that the primary attributes of ETFs—their typically lower costs, greater tax efficiency, and bias toward passive investing—will lead to their being favored.

“The DOL rule is like throwing gas on the fire with respect to asset flows,” said Todd Westby, who helped launch the iShares suite of ETFs in 2000 and is currently the chief executive officer of T Hayes Consulting.

According to a recent survey by Cerulli Associates, 45% of U.S. financial advisers expect to increase their ETF use as a result of the new regulation, which is scheduled to take effect in April.

Read:The fiduciary rule is coming—here’s how investors can prepare

While President Donald Trump has expressed interest in delaying the implementation of the rule, or even nixing it entirely, this isn’t expected to change the major trends in the industry. Brashaw’s $1 trillion estimate assumes the rule won’t be implemented. If it is, he said, that target would be reached by early 2018 rather than later in the year.

“The rule is good for ETFs, but if it isn’t implemented, that will only delay their adoption,” he said. “The trend won’t trail off.”

Despite the growth, the inflows won’t be evenly spread across the industry; Brashaw estimated that as much as 90% of the $1 trillion would go to the “Big Three,” referring to Vanguard, BlackRock (which operates iShares), and State Street, whose SPDR S&P 500 ETF Trust SPY, +0.45% is not only the first ETF ever launched, in 1993, but also the most widely traded and the largest, with about $222 billion in assets. As of the end of 2016, those three firms accounted for about 70% of the market share, according to ETFGI.

Furthermore, inflows will likely be concentrated within those firms’ biggest and most popular funds. According to data from Morningstar, a full 27.45% of total ETF assets are housed in the top 10 largest funds—there are more than 4,800 funds world-wide—while 15.4% of ETFs have less than $5 million in assets. This has led to the number of fund closures rising, as firms find it unprofitable to maintain small or thinly traded ETFs.