The European ETF market is set to hit at least $2.5trn assets under management (AUM) by 2025, according to a survey conducted by PwC, a growth rate quicker than even in the US.

The survey, which interviewed 60 global ETF players including issuers, market makers and administrators, found 85% of European respondents have predicted ETFs to pass $2.5trn by 2025, a 21% compound average annual return (CAGR).

This is a faster predicted growth rate than the US with 90% of respondents predicting the market will hit $9trn AUM by the same period, a 16% CAGR.

While the US is a more mature market, it is also seen as the country where ETFs are most dominant especially versus mutual funds due to the favourable tax advantages and larger number of self-directed investors.

Marie Coady, global head of ETFs at PwC, said the rate of growth in Europe is likely due to the relative immaturity of the market and increasing demand for certain segments such as ESG and thematic ETFs.

“The European industry continues to invest heavily in the education of the benefits of ETFs for certain types of strategies,” Coady continued. “In addition, European ETF issuers are very focused on launching strategies sought by investors such as those with an ESG lens, thematic focus and digital currencies.”

ESG, especially in Europe, is seen as the biggest potential growth area. All 100% of respondents in Europe expect to see significant investor demand for ESG ETFs in the coming years.

ESG ETFs exploded in 2020 and even outpaced non-ESG ETF inflows in Europe with a record €45.5bn net new assets poured into sustainable strategies, according to data from Lyxor.

As a result of the increasing demand, ETF issuers in Europe expect 75% of their ETF product pipeline will have an ESG focus over the next three years.

“The expected projected growth for ETFs is not surprising,” Coady concluded. “This is an industry with enormous potential. With prevailing low interest rates, investors continue to look for alternative places to invest to maximise returns.

“The features of ETFs liquidity, market access, low cost, transparency and increasingly diverse investment exposure mean ETFs are a very compelling product for investors.”