Asia is currently the smallest regional market for exchange traded funds (ETF), but it is poised to expand to US$560 billion in assets under management in five years, a PwC report reveals.

That’s a compounded annual growth of 18% through 2021 on the back of improved distribution channels and better investor education, says PwC.

“New and improved distribution channels, better investor education and further enhanced cross-border schemes are also seen as potential growth accelerators in the Asian ETF market,” says Maria Tsui, Asia ETF leader with PwC Hong Kong.

Globally, PwC expects accelerated growth in ETFs over the next five years, with AUM expected to exceed US$7 trillion by 2021.

PwC in a report predicts the market will achieve further significant growth through entering new markets, as well as expanding distribution channels and asset classes.

Many ETF providers are expected to expand their global footprint and offer ETF products across borders to compete outside their domestic markets. PwC believes that, to be successful, firms will need to develop an understanding of local and global tax laws and regulations.

Advances in technology and data analytics are expected to be significant contributors to the growth of ETF markets by encouraging new product creation and evolution in distribution channels. Digital technology and Big data will continue to enable successful firms to improve decision making processes, streamline costs and transform investor relationships.

Insurance companies are forecast to be among the main drivers of demand in Asia, whereas demand from retail investors is expected to be relatively low. Globally, by contrast, financial advisors, online platforms and retail investors are expected to be the top three segments driving ETF growth, mainly in North America and Europe. Online platforms have overtaken wealth management platforms in the top three global distribution trends.

It is somewhat surprising that only 35% of survey participants believe that lower costs are a potential differentiator in these increasingly crowded ETF markets, as PwC continues to observe downward fee trends, particularly with passively managed ETFs.

“Given the momentum and speed at which the ETF industry is developing, it is not surprising to see regulators across the globe focusing on investor protection,” says Tsui. “Regulatory developments will continue to be top of mind for those looking to expand in the ETF market, although not all regulations will be an obstacle. Some initiatives that promote fee transparency and low commissions may cultivate further ETF growth. ”

In a survey, respondents cited increased regulations as a major obstacle to growth of the ETF market.

The survey noted that the strength of a corporate brand was listed as the most important factor in raising assets under management, with 60% seeing it as very important. Investment track record and a differentiated investment strategy were also noted to be very important factors for future growth.

The North American ETF market is expected to grow to US$5.9 trillion by 2021 (a 23% cumulative annual growth), while the European market is expected to grow 27% annually, reaching US$1.6trillion AUM by 2021.

“The global ETF market has a bright future ahead, but the next few years will not be without their challenges,” says Tsui. “ The market is increasingly crowded, particularly in North America and Europe. Many firms are looking to expand their global footprint, which presents opportunities as well as challenges with respect to regulations, tax laws and establishing relationships with distribution partners. ”