Commitment from Retirement Plans Could Spark ETF Growth

Cerulli Associates analyzes the potential growth of exchange-traded funds in a new report.

The report contends: “The next few years may be pivotal in terms of determining whether it is business as usual for ETFs, or whether these products experience massive growth, posing a grave threat to mutual funds.”

In its latest U.S.-focused monthly publication, Cerulli says there are several factors that would redefine the potential for ETF growth in the retail third-party channel, including: 

  • Commitment of retirement plan sponsors to offering these vehicles; 
  • Decisions of regulators; and 
  • Dedication of asset managers, distributors, and advisers. 

In addition, the research says: “The biggest threat to mutual funds may not be ETFs’ touted advantages such as tax efficiency, but instead, it may be the ability of ETFs to market nontraditional assets. As investable assets are reallocated from domestic equity and fixed-income mutual funds to less traditional asset classes, many of those assets may shift from mutual funds to ETFs.”  

While ETFs are often promoted as a better mousetrap than mutual funds, they continue to grow at a more moderate pace than some originally predicted. In the last six months of 2010, mutual funds grew by $804 billion, while ETFs grew by $170 billion.   

Cerulli also pointed out that adviser allocation to ETFs remains relatively small. When looking across the channel spectrum, close to half (47%) of advisers are using ETFs which is much less than the 92% using equity mutual funds and 75% using individual securities.