ETF assets said to triple — yes, triple — by 2016

New research shows advisers helping fuel dramatic rise in use of exchange-traded funds

By Darla Mercado

Nov 13, 2012 @ 3:35 pm (Updated 3:47 pm) EST

ETFs

Exchange-traded funds are picking up steam now, and that momentum is expected to continue into 2016.

Assets in the baskets of securities hit $1.05 trillion in 2011, according to an analysis of U.S. retail and institutional asset management conducted by Cerulli Associates Inc. The research group expects the number of dollars in ETFs to reach $1.33 trillion at the end of this year and rise as high as $3.45 trillion in 2016.

Though the dollar figures themselves are smaller compared with long-term mutual funds, which had $7.79 trillion in assets last year — and are forecast to reach $13.1 trillion in 2016 — the expected growth rate for ETFs beats out those of many other product categories. Variable annuities, for instance, had $1.5 trillion in assets last year and are forecast to reach $2.22 trillion in 2016.

“The growth in ETF assets comes from increased adviser adoption, as well as the adoption of ETFs by institutions, using this for specific exposure to an asset class,” said Alec Papazian, senior analyst at Cerulli and author of the study.

Aside from getting a boost through advisers, ETFs are enjoying popularity on direct platforms, according to Mr. Papazian. Those clients are sensitive to cost and are seeking investments with no commissions.

Cerulli surmised that some $27.3 trillion in addressable assets are available to investment managers, counting retail and institutional assets.

Though ETFs are a product with a big future, defined-contribution plans present another yawning opportunity for asset managers, according to Mr. Papazian's analysis.

Typically, money in DC plans is held in traditional asset classes, including U.S. equity, core fixed income and stable value. The need to replace underperforming funds can present an opportunity for asset managers, particularly if the fund that's being replaced is used in large group of plans, according to Cerulli.

Among distributors, wirehouses manage the lion's share of assets, accounting for 41% of the assets under management market share but only 16.3% of the adviser market share. Independent broker-dealers, meanwhile, made up 14.1% of the AUM market share but 25.2% of the adviser market share.

Market share aside, wirehouses still face substantial obstacles. Mr. Papazian noted that while wirehouses are the largest source of gross sales among third-party distributors, they are the channel with the highest costs for service and sales. Wirehouses also are losing advisers to independent-broker-dealer firms and registered investment advisory practices as more brokers decide to become independent.