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Martin Small discusses the forces that could grow the ETF market to $12 trillion over the next 5 years.

Exchange traded funds (ETFs) are the most enduring investing trend in a generation. This century began with fewer than $100 billion in ETF assets and now counts $4.7 trillion across an ever-expanding number of products.1

Expect growth to accelerate. As detailed in the full report, sweeping developments within the investment management industry are putting ETFs on course to potentially gather more assets over the next five years than in the previous 25 years combined.2 Global ETF assets are poised to more than double to $12 trillion by the end of 2023 and possibly reach $25 trillion by the end of 2027.3

Four trends are likely to fuel future ETF growth, especially in the U.S. and Europe:

ETF investors are active investors. ETFs are increasingly used in portfolios to seek outcomes that differ from the broad market. Investors are likely to step up their use of ETFs as building blocks in asset allocation and as vehicles to deliver factor-based investment strategies that seek to emphasize persistent drivers of return.

Investors everywhere are sensitive to cost and demand quality. ETF adoption dovetails with the recognition by all types of investors that costs can have a significant impact on long-term returns. Investors everywhere want the highest quality at the lowest cost. That means ETFs are likely to be used by self-directed retail investors and sophisticated institutions alike as core broad market exposures.

A transformation in the business model for financial advice is under way in the U.S. and beginning in Europe. Investors are increasingly paying wealth managers a transparent fee based on assets, instead of an indirect fee via brokerage commissions and retrocessions. A secular transition to fee-based advisory models puts a focus on lowering costs and using simple asset allocation. This backdrop could favor ETFs at the heart of portfolios.

An evolution in the way bonds trade favors ETFs for efficient market access. The bond liquidity that many institutions once took for granted is evaporating. To facilitate large transactions, investors are increasingly likely to use bond ETFs alongside or instead of single securities.

Read full report

Martin Small
Managing Director
Head of U.S. iShares at BlackRock
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