Report: US ETF Assets Poised to Double by 2015

A new report by BNY Mellon and consultant Strategic Insight -- which analyzes the factors fueling the rapid expansion of the ETF market and how asset managers can profit from the expansion -- predicts that ETF assets will reach $2 trillion by 2015.

(July 14, 2011) — Assets in exchange-traded funds (ETFs) are projected to double to more than $2 trillion by the end of 2015, a report by BNY Mellon and aiCIO‘s sister company Strategic Insight shows.

The report — titled “ETFs 2.0: The Next Wave of Growth and Opportunity in the U.S. ETF Market” — revealed that ETF assets grew by 28% to just more than $1 trillion in 2010, down from the 47% growth rate in 2009. Furthermore, according to the report, roughly half of the U.S. ETF assets are from institutional clients.

According to Loren Fox, senior research analyst at Strategic Insight and an author of the report, investors are increasingly willing to use ETFs following the global financial crisis as they are increasingly willing to pay more for innovative products that promise greater return and lower volatility.

“The next wave of growth for ETFs is being driven by new asset classes, new indexes and new ways to use ETFs as tools for portfolio construction,” said Joseph Keenan, head of global exchange traded fund services at BNY Mellon Asset Servicing, in a release. “The ever increasing sophistication of these newly created ETFs can pose operational and distribution challenges for asset managers. However, with detailed planning and a focused strategy, a variety of innovative exchange-traded products can be brought to market to effectively meet investors’ needs.”

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The report follows a recent Greenwich Associates study that revealed that institutional investors are increasingly bullish on using exchange-traded funds (ETFs) in their portfolios.

“Perhaps even more telling than those findings is the fact that not a single asset manager reported plans to cut ETF allocations in the coming two years, and less than one in 10 institutional funds plan to reduce allocations to ETFs in that period,” says Greenwich Associates consultant Andrew McCollum.

To contact the <em>aiCIO</em> editor of this story: Paula Vasan at <a href='mailto:pvasan@assetinternational.com'>pvasan@assetinternational.com</a>; 646-308-2742

Britain's Office for Budget Responsibility has revealed that the total liabilities for the pensions of teachers, policemen and civil servants totals £1.13 trillion.

(July 13, 2011) — The UK’s total liability for funding public sector pensions has risen by 30% in two years to £1.13 trillion.

Public debt, meanwhile, is now nearly £2 trillion.

According to Treasury officials, the rise in pension liabilities is due to increasing life expectancy along with growth in public-sector wages and an increase in the number of employees.

Discount rates are also a factor. “Almost £260 billion of this increase had nothing to do with the prospective size of public-service pension payments,” Chairman Robert Chote told reporters in London today, according to Bloomberg. “Instead, it reflected a fall in the so-called discount rate used to convert the flow of future payments into an upfront sum. Next year the discount rate will rise, pushing the liability back down again.”

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He added: “Nothing we say today should be construed as a call for a bigger fiscal tightening over the next four years. But an aging population does have fiscal costs.”

In May, a study released by Xafinity Corporate Solutions showed that UK-based corporate pensions have seen their collective deficit rise by close to 19% since February, with this deficit now totaling £430 billion. The deficit was just £58 billion in 2008, according to the company.

“This mark up of nigh on £100 billion illustrates two lessons. First, costs can swing by very large amounts over very short periods – in this case, just the second half of April,” said Hugh Creasy, director of the company, according to a company release. “Second, it puts into context the Office of National Statistics (ONS) recent news over employer contribution hikes. The ONS tell us that employers have paid in around £16 billion extra in contributions over the last two years, just one sixth of the interest rate hit.”

In the US, the Governmental Accounting Standards Board (GASB) has issued proposals to improve the way public pension funds report their liabilities. As investors have raised concerns that unrealistic expectations of investment returns have concealed the actual size of many unfunded pension obligations, the proposals aim to change the formula that schemes use to determine the value of their pensions.

Read “Pension Quandary: Valuing Liabilities” in the Summer issue of aiCIO Magazine: a discussion of public fund discount rates – and what rates are and are not appropriate to use when defining a plan’s liabilities, by Charles E.F. Millard, the former Director of the U.S. Pension Benefit Guaranty Corporation and now a Managing director leading Citigroup’s Pension relations team.

To contact the <em>aiCIO</em> editor of this story: Paula Vasan at <a href='mailto:pvasan@assetinternational.com'>pvasan@assetinternational.com</a>; 646-308-2742