LONDON Sharp withdrawals from equity, currency and commodity tracking funds as emerging markets sold off in early 2014 looks no more than a bump in the road for such vehicles as they expand their share of assets under management.
Long used by banks and other institutions, exchange-traded products (ETPs) - which let investors track a range of underlying markets for a small fraction of the fees charged by managed funds - are increasingly being sold to cost-conscious retail savers in a move helped along by regulatory change.
They are part of the toolkit of cheaper "passive" investment strategies which consultants PwC expect to double their share of an asset management industry expected to be worth $100 trillion by 2020. More expensive, "active" funds, relying on managers' skills to outperform markets, would see their share shrink, a recent PwC report found.
Some $19 billion was withdrawn globally from ETPs linked to the three asset classes - equities, forex and commodities - between January 1 and February 12, on concern that tighter U.S. monetary policy would undermine emerging markets, Markit data showed. But ETP managers expect even more to flow back in time.
"The overall trend in the market is to use more passive products," said Manooj Mistry, head of exchange-traded products in Europe, the Middle East and Africa for Deutsche Asset & Wealth Management. "ETFs (exchange-traded funds) benefit from that and the bulk of the growth is in the main market indices."
Deutsche Bank and Societe Generale unit Lyxor are the top Europe-based issuers of ETPs. U.S. leaders include BlackRock and Vanguard, which alone took in $75 billion in new money last year.
In general, actively managed funds do not trade on exchanges.
Despite forecasts of growth in coming years, several ETFs have seen massive outflows in recent weeks including the world's biggest platinum fund, South Africa-listed NewPlat, which posted its largest ever outflow earlier this month.
Collectively, PwC said, passive strategies would account for 22 percent of the market in 2020 up from 11 percent now, while active managers would drop to 65 percent from 79 percent. Alternative investments, like hedge funds and private equity, would see their share rise to 13 percent from 10 percent.
Many investors will continue to be attracted to managers who can secure them returns whatever the broader market does, however, especially if the relentless rise in passive products can pressure active managers to lower their rates.
In spite of the emerging market-led fall of more than 3 percent in ETF assets under management in January, Markit data showed the industry took in a net $3 billion of new money globally, thanks to demand for fixed income funds.
That followed a 6.5-percent rise in global net new money in 2013 that helped take total assets to more than $2.6 trillion, Markit added. Over 10 years, the industry has grown at a compound annual rate of 23 percent, data from independent research firm ETFGI showed.
There was some regional disparity in 2013, with Europe and the Americas both seeing money leave ETPs while Asia took money in, Markit data showed. But Deutsche Bank said U.S. ETFs took in more money than actively managed mutual funds and that total global assets could well hit $3 trillion in 2014.
That measure of assets takes account of both the money that has been invested in or withdrawn from a fund, as well as the increase or decrease in the value that it is tracking.
The move to passive investing will increasingly be aided by regulators, PwC said, citing the example of Britain's Retail Distribution Review. This made fund costs more transparent and removed advisers' incentive to push business to managed funds.
"The new regulations will mean there are more individuals investing in ETFs. They are going to be a bigger feature for more people," said Adam Laird, Passive Investment Manager at British fund "supermarket" Hargreaves Lansdown.
As demand for access to ETPs has increased, the number of products has ballooned, Markit data showed, from 3,364 separate products in 2010 to 5,347 in 2013. The year-on-year jump last year was close to 12 percent.
With investors' focus on cost set to continue - last week, Deutsche Bank announced it was cutting commissions on four of its biggest ETFs - Vanguard's European head Thomas Rampulla said that while an active strategy can work well, investors should typically have at least some money in passive.
"There are times when active strategies outperform passive and vice versa, in terms of fund performance," he said. "But passive tends to return more overall in the long run because of its low cost."
(Additional reporting by Freya Berry and Blaise Robinson; Graphics by Vincent Flasseur; Editing by Alastair Macdonald)