Global exchange-traded product (ETP) assets are expected to double to US$6 trillion ($7 trillion) over the next five years, BlackRock predicts.
“The secular trends of increased ETP adoption and market expansion contributed to record flows in 2014 and will be the driving forces behind future growth,” says the BlackRock Global ETP Landscape report.
The industry will continue to evolve to encompass new users and new uses. This will include, among others, an expanding retail segment in Europe and greater use of fixed income ETPs by banks and insurance companies.
The breadth of strategies and exposures offered by ETPs, as well as more extensive cross-border investment brought by the globalization of the industry, should enable further market penetration.
Read: Four key ETF trends in 2014
“Regardless of the investment climate, ETPs are increasingly becoming viable alternatives to individual stocks and bonds, derivatives and mutual funds,” the report notes.
Themes to watch in 2015 include smart beta, emerging markets and Japan equities.
Assets for smart beta equity have quadrupled since 2008. Investor appetite for tailored exposures not available via traditional market cap-weighted funds has accelerated in the past two years. Flows remained robust in 2014 after surging in 2013. Organic growth for smart beta is 18%, twice that of market cap-weighted equity ETPs.
The biggest contributors to this growth have been dividend-focused and minimum volatility funds. Minimum volatility ETPs have regained momentum as a result. The proliferation of factor funds is also a key development in the ongoing growth of smart beta.
Read: Smart beta ETF usage expected to grow
Investors had maintained an underweight stance to emerging markets last year and through the first quarter of 2014, with redemptions over this stretch totalling US$25.4 billion. All of this money returned during the second and third quarters alone.
“Prospects for countries in Asia such as China and India are the most favourable, on valuation grounds as well as due to policies supportive of growth,” says the report. “These countries also have lower vulnerability to foreign capital flowing out in a rising interest rate environment.”
Read: Investing in frontier markets
Flows into Japanese equity have reached US$13.4 billion. Still-attractive valuations and aggressive government stimulus make this an important investment theme for 2015.
Momentum accelerated in November, with flows of US$4.1 billion for U.S.- and Europe-listed ETPs on news of expanded monetary easing and a doubling of the domestic equity allocation for the government pension fund.