ETF fees set to drop as passive investment outstrips active
The cost of exchange-traded funds (ETFs) is expected to fall over the next three years, according to a study by EY. The study predicts passive management, responsible for the majority of ETF assets, will have a greater share of the market than active funds within the next 10 years. Almost three-quarters of respondents surveyed for the study said they anticipated fees would continue to fall, with being a low-cost provider seen as a necessity for success in the ETF space. Average ETF fees fall by approximately 27 basis points each year.  

As the cost of exchange-traded funds continues to plummet and becomes more affordable, there is still room for competition in the booming sector, latest EY research reveals.

Over the next three years, EY's ETF report shows the global market will reach US$7.6 trillion, and a substantial number (66%) of asset managers will offer ETF products in the near future.

The report, which surveyed 70 ETF providers, found price points and the ability to innovate are crucial for the sector to maintain its growth trajectory.

Despite ETF fees continuing to fall to an average of 27 basis points last year, 71% of respondents predict fees will decline even further as becoming a low-cost provider is a prerequisite to survival.

Zero-fee ETFs will not become the norm, the report noted, but in 10 years' time, passive funds' assets will exceed those in actively managed funds globally. ETFs consequently will benefit disproportionately from this shift as a result of low fees and intraday liquidity in volatile markets.

Forty-three per cent of respondents said there is insufficient competition among index providers and expect more players to enter the space, including more self-indexing.

Participating in stock lending programs, digital distribution and best execution are some ways to continue to reduce costs for investors, the report suggested.

In terms of demand, institutional investors will continue to dominate ETF investing over the next three years, and up to 25% of inflows will come from new investors.

Wealth managers, private banks and investment funds are showing promising interest in ETFs. Pension funds are likely to use ETFs to manage liquidity, while wealth managers are expected to look for core exposure through model portfolios.

EY warned that ETF providers will need to anticipate investor needs, incorporate macro trends in regulation and technology, and focus on educating investors - product development will involve launching new thematic ETFs, greater access to debt and investing in alternatives.

ETFs will help new entrants defend against declining mutual fund inflows and will form as part of a product range that include fixed income or smart beta products, the report said.

EY Oceania wealth and asset management leader Antoinette Elias said in the last 12 months, Australia's ETF market capitalisation increased by 39% to $33.3 billion.

"The local ETF market is taking a growing share of the traditional managed funds space and continues to be retail investor driven, rather than institutional. Access to broader asset classes and international exposure is making ETFs increasingly attractive to retail investors," Elias said.