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Banks, Financial

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Categorized | Financial

Top three keep smaller rivals at bay – for now

Posted on January 31, 2014

Pedestrians walk with umbrellas in front of BlackRock Inc. offices in New York, U.S., on Friday, April 12, 2013. BlackRock Inc. predicts Canadian 10-year benchmark bond yields may fall to the lowest since at least the 1950s as a sputtering economy douses expectations the Bank of Canada will increase borrowing costs this year. Photographer: Scott Eells/Bloomberg©Bloomberg

Battle lines: BlackRock believes it can retain the top spot

BlackRock, Vanguard and State Street have long dominated the US exchange traded fund industry, but their fast growing, smaller rivals are working hard to stage a revolution.

Last year BlackRock, Vanguard and State Street pulled in $40.4bn, $55bn and $14.8bn respectively from US investors to their ETF ranges, and collectively account for 81.5 per cent of the US market, according to figures from ETFGI.

    But their grip on the US ETF industry has not deterred smaller or lesser known rivals from attempting to chip away at this stranglehold. The likes of WisdomTree, PowerShares, Guggenheim and Charles Schwab also managed to attract billions of new investment last year and narrowly increased their market share, but scepticism abounds as to whether they can seriously challenge the players at the top.

    Ben Johnson, an ETF analyst at Morningstar, the data provider, believes it will be difficult for any of the fast-growing players in the middle of the rankings to usurp one of the ‘big three’.

    He thinks any changes at the top of the league table are highly unlikely. “It is not strictly forbidden, but it’s a very steep climb. This is an area that is marked by low barriers to entry but very high barriers to success”.

    A problem for newer entrants to the US market is that the big three long ago established themselves as the go-to providers of traditional market cap weighted ETFs, which attract the bulk of new assets.

    Mr Johnson points out that some of the smaller players, such as Charles Schwab, have made progress with “me-too” type ETFs that similarly track market cap weighted indexes, “but they are still significantly smaller than the first tier players”.

    He adds: “The smaller second and third tier players will continue to make inroads around the edges and grow their businesses at a relatively rapid clip, but I think the incumbents are extremely well entrenched.”

    These dynamics, however, have not dented the optimism of ETF providers lower down the food chain. Vern Sumnicht, chief executive of iSectors, an ETF-focused investment manager, is confident the US ETF industry is about to undergo substantial changes.

    “The ETF industry is no different than any other industry in the US, [and] many of the big players today may not even exist in five years. WisdomTree and Guggenheim might merge with PowerShares to form a competitor to the big five, or even overcome and consume one or two of the big five,” he says.

    “The one thing to remember is that the ETF industry is still young, has a lot of money flowing into it and it will change. Five or 10 years from now, it would likely look nothing like it looks today.”

    Many of the up and coming ETF providers, meanwhile, are optimistic they can continue to build market share and gain a foothold among the top five providers – or higher.

    William Belden, head of Guggenheim’s ETF business, which attracted $7bn from US investors last year, says: “We have been a strong beneficiary of alternative approaches to capturing market exposure and we have seen dramatic improvement in the acknowledgment and usage of those strategies. Being a top-five provider is not a stated goal of ours, but there is no reason why we can’t be at that level.”

    Charles Schwab, meanwhile, is pinning its hopes for a leading position on its commission-free platform and low pricing.

    Can Schwab seriously contend with the biggest three players? “Absolutely,” says John Sturiale, senior vice-president of product management at Charles Schwab Investment Management, which attracted $6bn from US investors last year. He adds: “We have good products in very popular areas, low costs and a commission-free platform [which makes us] even more attractive. I wouldn’t say all of the big guys can claim to have all three.”

    Nonetheless the big three providers are cool – even generous – in their reaction to competition from the ETF upstarts. Kevin Quigg, head of sales strategy at State Street Global Advisors, says: “We welcome new providers as they contribute to advancing investor resources and solutions and promote awareness of ETFs in the marketplace.”

    Daniel Gamba, head of BlackRock’s institutional business at iShares, is similarly relaxed. “We compete with some of these niche players and it’s good – we support competition,” he says.

    But he adds: “We will continue to have the top position as we innovate and compete in most parts of the market.”

    Morningstar’s Mr Johnson, however, points out one headwind for the biggest providers.

    “The types of strategies [the niche providers] are increasingly bringing to market are not substitutes for traditional beta products, but substitutes for actively managed products,” he says. This, he adds, could give a serious advantage to creative ETF houses lower down the leagues.