The FSA's plans to overhaul regulations governing investment advice will spark a boom in the use of ETFs in the UK, according to BlackRock.
The report, produced by BlackRock's global ETF research and implementation strategy group, is dubbed the first to focus solely on ETFs in the UK.
It says independent financial advisers are likely to increase their use of ETFs because they are particularly well aligned with the intent of the FSA's Retail Distribution Review (RDR) proposals.
ETFs have been cited by the FSA as one of the packaged products that advisers, who decide to operate as independent after 2012, must understand. This is in order to prove that their client recommendations are based on a comprehensive and unbiased analysis of the whole investment market.
BlackRock global head of ETF research and implementation strategy Deborah Fuhr says: "As such, we have seen an increasing number of requests for information on ETFs, which are both listed and registered for sale in the UK."
But apart from fitting well within the RDR regulatory regime, ETFs have also benefited from a surge in demand for greater transparency in terms of cost, liquidity, holdings, as well as risk and return characteristics in light of the financial crisis in 2008.
At the end of March, there were 239 unique ETFs listed on the UK's London Stock Exchange (LSE), with assets of $49.8bn, double the amount under management a year earlier.
Of these, 183 have UK distributor status, which means UK domiciled investors will pay capital gains tax (CGT) rather than income tax on profits.
This is still an advantage despite the rise in CGT to 28% for higher rate tax payers in last week's emergency Budget.
In other findings, the report shows that at the end of the March, there were 22 ETFs listed in the UK with assets greater than $1bn and 101 ETFs with assets greater than $100m.
iShares, the first ETF provider to list in the country, dominates the UK market, with $7.24bn in its S&P 500 product. This is followed by iShares DJ Eurostoxx 50 and iShares FTSE 100, which each have more than $5bn in assets under management (AUM).
ETFs from Deutsche Bank's db x-trackers also featured in the top 10 ETFs by AUM in the UK, with $3.88bn in its MSCI Emerging Market TRN index product.
The most traded ETF in the UK as at the end of the first quarter was the iShares FTSE 100, which saw investors whip out $439.1m.
On the upside, the ETF with the largest net new assets in the first quarter of 2010 was iShares MSCI Emerging Markets, attracting $286.1m in the first three months of the year, followed by iShares MSCI Japan, which pulled in $269.4m over the same period.
The BlackRock team expects investor demand for ETFs to grow globally, helped in the UK by the FSA's new regulatory regime, which will scrap adviser commission and ensure advisers charge for their services rather than on the basis of the products they sell.
The structure of ETFs does not support commission remuneration, which is one of the reasons for slow adoption to date among advisers in the UK, according to the report, but the belief is this will change.
Furthermore, the report highlights the role of fund platforms in the delivery of ETFs, with many reviewing and building the functionality to provide wider securities access in response to adviser interest.
The report outlines how large online brokers and platforms in the US, including Charles Schwab and Fidelity, have embraced ETFs as a competitive marketing tool recently and says this trend is likely to develop in the UK and Europe.
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