2012: A Watershed Year for ETFs?

Cost pressures and closures could reshape the space.

September 12, 2012

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two road uncertain directionSo far, 2012 has brought a mixed bag of good and bad news for the exchange-traded fund (ETF) industry. As big providers such as Russell pull out of the passive space, the rest of the industry continues to boom. Last week, for example, global ETF consultancy ETFGI reported that, on a worldwide basis, exchange-traded product (ETP) assets hit US$1.76 trillion at the end of August, a 2.3% gain month-over-month and a 15.5% jump year-over-year.

Canada is also growing. A report last week from BMO showed the Canadian ETF industry with $50 billion in assets under management, up an impressive 15.9% since the beginning of 2012. BMO’slatest Canadian ETF Outlook Update also predicts dramatic growth ahead for the industry, fuelled by more distribution channels, new entrants into the ETF space, a growing number of new implementation strategies and the rise of actively managed ETFs. In Canada, bond ETFs are a big part of the picture, dominating fund flows and growing from $12.9 billion to $17.8 billion in assets under management since the start of the year.

While 2012 has been a great year for growth, it’s also starting to look a bit like a watershed year for the ETF business, especially as the price war continues to heat up, making it harder than ever for ETF providers to turn a profit. Prices have put pressure on all aspects of the industry, promptingspeculation last week that Vanguard’s move to slash prices might cause other big providers to cut their fees, too.

Is there a shakeout rolling through the ETF industry? Possibly. The more likely scenario will be that price pressures push the industry to grow in new ways—more actively managed products, for example, or an increased focus on the growing institutional market where price isn’t as much of an issue. Right now, according to ETFGI, there are 4,713 ETPs globally—as the price war heats up and as the space continues to innovate and evolve, that will be the number to watch in 2013.

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