by Detlef Glow.
Observing the monthly flows into the European exchange-traded fund (ETF) industry, one might get the impression that the inflows go only to a limited number of ETF promoters and only to a limited number of funds that have shown significant growth in assets under management. If this thesis were true, the market share of the funds with high net inflows would increase more and more over time, up to a point where these funds would dominate the whole European ETF industry. On the other hand, the European ETF industry is very innovative and widens its product offerings frequently, enabling existing clients and new investors to participate in new asset classes and rising trends in the markets, leading to new inflows to the ETF industry.
Exhibit 1. Number of ETFs with more than €1.0 bn in assets under management (08/31/16)
As Graph 1 depicts, the number of funds with more than €1.0 billion in assets under management has shown a significant increase since the “euro crisis.” This increase can be explained by the rising popularity of ETFs that arose during this period. The core asset classes such as equity U.S. or equity Europe have profited the most from this trend, since these asset classes normally comprise a large share of the portfolios of all kinds of investors. Within these asset classes funds that already had high assets under management have profited the most, since these products have enough capacity for institutional investors and, because of their size, high liquidity with low trading spreads. But beside these established ETFs, there are also a number of newly launched products that have been able to gather more than €1.0 billion in assets under management. This has driven the overall number of ETFs with more than €1.0 billion in assets under management from 34 (12/31/16) up to 109 (08/31/16). Compared to the overall number of ETFs registered for sales in Europe (2,081), this number does not look disproportional.
The most important question regarding the concentration of assets under management is how high the market share is in terms of the assets under management of the funds with more than €1.0 billion compared to the rest of the industry. As of August 31, 2016, the 109 funds with more than €1.0 billion in assets under management held €278.89 billion. This amount equaled 58.03% of the overall assets in the European ETF industry (€480.62 billion). These numbers showcase the high concentration in assets under management at the single-fund level. Surprisingly, Graph 2 shows that the assets under management in the European ETF industry were already concentrated when this type of product was launched in 2001. Even though there was only one ETF holding more than €1.0 billion in assets under management, this fund had a market share of 44.61% of the overall assets under management in the European ETF industry.
Exhibit 2. Market share (in euros) of ETFs with more than €1.0 billion in assets under management of the overall assets under management in the European ETF industry
Since the 109 ETFs with assets under management of more than €1.0 billion now have a market share of 58.03% of the overall assets under management, one can conclude that these funds have a dominating market position in the European ETF industry and have had this since the launch of the industry in Europe. Such a market concentration can be seen as a threat to overall competition in the industry and should therefore be seen as critical. But since the assets under management, especially in the equity segment, are dependent on movements in the underlying markets and the general trends played by investors, the assets under management in single ETFs are subject to change. In addition, ETFs are very transparent, and ETF investors seem to be very cautious with regard to the tracking quality of the ETFs they use in their portfolios. This means investors would not accept underperformance of an ETF over a medium time horizon and would switch to a higher-quality product if it were available. This investor behavior keeps the quality high, since the competition and therefore the number of products is, especially in the core asset classes, very high. Last but not least is that the number of products in Europe is always increasing, since the ETF promoters want to keep up the competition and generate new flows into the ETF market. Even if the industry is quite concentrated, some of these new products will be able to become “blockbuster” products themselves. Time will tell whether all these new products are really needed and necessary, but for the time being there is quite lively competition between the European ETF promoters.
The views expressed are the views of the author, not necessarily those of Lipper.