It’s Getting Cutthroat

Our survey of the first half’s exchange-traded product assets under management figures and cash flows, published yesterday, showed 30%-plus AUM increases for eight of the top fifteen providers, and growth for all but two of them.

At the same time, fees are being squeezed: the move of Amundi and Comstage up the league tables over the last few quarters is at least partly due to their aggressive pricing policy, while iShares, typically the most expensive provider at the headline fee level, continues to suffer a steady drift in its European market share.

According to Richard Kushel of iShares’ newish parent BlackRock, as reported in Ignites Europe, the fund manager wants to get its non-US ETF market share back up to 50%. That’s a tall order, given that it’s now down to 36% in Europe, or less than a third if you include all ETPs.

Rory Tobin’s departure from iShares late last week may or may not have been a company response to the recent slippage. BlackRock’s press team presented the firm’s management reshuffle as a fairly normal reorganisation following a large-scale merger. But Kushel’s comments suggest that we’re about to see an aggressive new sales push from the ETF industry leader, which may include some more price competition. As my colleague Matt Hougan wrote last week, iShares’ recent decision to cut fees on its U.S. gold ETF signalled the firm’s first significant concession on pricing for a long time.

Meanwhile, in Europe even more than elsewhere, we’re still seeing new entrants stake a claim to market share. How many more ETF issuers can there be, though? For public consumption, most issuers will say that there’s room for plenty of new players, given the prospects for market growth. One seasoned industry figure, however, disagrees. “When you call an investor to try to sell him the twentieth version of a bank sector ETF you’re going to start pissing him off,” he said, exaggerating slightly but making his point.

On the trading side things are also getting tight, despite the overall increase in ETFs’ share of equity market trading volumes. One dealer I spoke to said that new market makers are willing to come in, undercut everyone else and take trading losses for a year in order to get into the ETF business and in the hope of winning ETF-related swap transactions. That of course makes it hard for everyone else to make a living trading.

And, he added, investment banks are looking ever more closely at ETFs as they begin to take away demand from banks’ swap desks, a traditionally lucrative business area when dealing with hedge fund clients.

Before we start to feel too sorry for banks and brokers, all this competition is undoubtedly driving down costs for the investor end-users of exchange-traded funds, of course – which is great news.

There’s undoubtedly a risk, though, that the response of industry participants to competitive pressures might be to take short cuts in their day-to-day management of ETFs – which, as we know, can use collateral or stock lending in ways that are operationally difficult and time-consuming to run. Issuers may also be increasingly tempted to embrace complex, higher-margin products and to try to recreate them as ETFs, something that is not in investors’ interests and could even end up discrediting the whole brand if a fund were to blow up.

So, for that reason, signs that the ETF market is becoming cutthroat should be both welcome and cause for investor vigilance.

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