Paul - your excellent blog from Friday about the interplay of the ETF and hedge fund/active funds businesses set off some interesting thoughts for me. And the more I reflect on it, the more I think that the outcome of the iShares deal could have real importance for the ETF business and for exchange-traded fund investors.
Certainly conventional wisdom has been that the iShares deal wouldn't have a major impact on iShares funds or the business, but the more I think about it, the more I think this could be wrong. Conventional wisdom has certainly been wrong in the ETF business before. At one point (sometime just after the PowerShares deal), conventional wisdom was that large active managers would begin snapping up ETF product issuers to shore up their brands and product offerings. As a result, small issuers looking for gold in a quick sale sprouted up like mushrooms.
Well - how has THAT worked out? Now the next really big ETF deal could involve the very largest player being spun off in a private equity transaction that looks very, very different in its implications. Is THIS the wave of the future or an anomaly? Or will iShares end up being sold, together with the whole of BGI, to a more traditional bank or fund management company? What are the implications of all this?
Briefly, there are arguments for both kinds of deal:
For a private equity deal, the PURE ETF company can cut loose on innovation with no fear of cannibalization and, perhaps even more importantly, a dedicated sales force selling and marketing only ETFs.
- For a purchase by an asset manager, you've got the obvious potential benefits of added scale and cost efficiencies across the business, and theoretically, at least, the potential of bringing huge, effective sales forces and marketing teams to the table to boost ETF product sales. The issue has been that it is difficult (inexpensive) for ETFs to compensate sales teams (which are also more used to selling other things) at the same level as those other products. And there IS more potential for cannibalization of other (higher-margin) products.
So there you have it. If a BlackRock or a Goldman comes in, they probably come in with chainsaws and then work hard to get everyone on the same page for maximum efficiency. And with the PE deal, it's a clear path, but potentially with LESS scale and efficiency long term.
I don't know which way it's going to go ... at this moment the spinoff deal is the only one on the table, but time will tell.