The announcement that BlackRock has signed a letter of intent to buy the exchange-traded fund arm of Credit Suisse will come as no surprise to the global ETF market.
The move follows reports in December that–viable contender–State Street was out of the running for CS ETFs and the other rumoured competitor, Vanguard, has not made an acquisition for a number of years.
We all sort of knew that BlackRock would be the one to purchase Credit Suisse’s ETF business. The firm has traditionally grown via acquisition and Swiss domestic ETF assets were a gap in BlackRock’s fund range.
The purchase will see BlackRock gain $18 billion in assetsand in return command nearly 48 percent of total market share in Europe, according to year-end data from research firm ETFGI. This is made up of iShares’ existing market share of 42.2 percent and Credit Suisse’s 5.3 percent. The combined entity will also have a market share of 74.6 percent in the physical European ETF market.
Whichever way you look at it the figures for the overall European ETF market give BlackRock more than three to four times the market share of its nearest competitors. Deutsche Bank has 14.2 percent and Lyxor has 11.8 percent of market share, respectively, according to ETFGI.
You could be mistaken for thinking that the European market is heading in a similar direction to the US market. In the US there are three main providers–BlackRock, State Street and Vanguard–with a number of smaller, bespoke, providers. BlackRock has a 41.4 percent market share with State Street and Vanguard holding 23.6 percent and 18.1 percent, respectively, according to BlackRock’s landscape report. In short, the US has a competitive landscape that looks a lot more, well, competitive.
It is understandable, therefore, that not only has this raised a few anti-competition questions–according to Hector McNeil, co-CEO of Boost ETP, 48% is a very high market share and could probably stifle competition–but the real concern now, given the dwindling interest in the synthetic ETF model, is who can actually compete with BlackRock? And have European investors ended up with only one viable physical provider?
Rather frustratingly, it seems that Europe has allowed one large player, iShares, offering primarily physical replicated funds, to dominate, according to one observer.
Lee Kranefuss, executive-in-residence at private equity firm Warburg Pincus and former head of iShares, told IndexUniverse.eu that European investors have been driven towards dealing with iShares in the absence of credible alternatives, even to the extent of buying US-listed, physically replicated ETFs and suffering tax disadvantages as a result.
So who can compete with BlackRock?
The two nearest competitors to BlackRock are Deutsche and Lyxor, whose fund ranges are predominantly derivatives-based (synthetic). But, recent fund flows have shown that customers are reluctant to deal with anything that has an opaque structure and which relies on bank credit in any way, says Kranefuss.
In Europe physical ETFs gathered net inflows of $23.1 billion in 2012, compared to net inflows of only $3.2 billion into synthetic ETFs, according to ETFGI’s data.
Kranefuss concludes: “What Europe needs are some more large-scale ETF providers, offering a long-term commitment to the business and with a range of physical and synthetic funds. If you had such issuers I think the flows into European ETFs would be higher than what we see now.”