December 5, 2016

Monday Morning Memo: Is the dominance of big players killing competition in the European ETF industry?

by Detlef Glow.

For most market observers there is no doubt that the European exchange-traded fund (ETF) industry is a high-growth industry, since it is still enjoying—even after 15 years of existence—a double-digit growth rate. The assets under management (AUM) have grown since the first ETF promoter in 2001 from zero to 483.79 billion euros (as of October 31, 2016). Even though the market for ETFs in Europe—with 2,094 products issued by 48 ETF promoters—looks quite efficient and accessible for new promoters, one needs to look at this in more detail to see if that assumption is true.

As of October 31, 2016, there are 48 ETF promoters active in Europe, offering 2,094 products (all share classes) to investors. This number of products and promoters would normally mean the AUM would be broadly diversified over different products, asset classes, and promoters, with no unusual concentration at the product and promoter level. But the distribution of AUM in Europe as of October 31, 2016, shows a totally different picture.

Exhibit 1. Market share of the ten top ETF promoters by assets under management (October 31, 2016)

 Market ETF Promoter in Europe October 2016

Source: Thomson Reuters Lipper

The AUM is not only concentrated at the single-fund level (to find out more, read the Monday Morning Memo: Is the European ETF industry dominated by only a few funds?) and asset-class level, the concentration of AUM is even higher at the promoter level; the ten top promoters hold a total of 448.02 billion euros or 92.61% of the overall AUM in the European ETF industry. This means the other 38 ETF promoters account for only 7.39% (35.77 billion euros) of the AUM in Europe. Such a high concentration of AUM may lead to the conclusion that the largest promoters dominate the market and might be able to skew competition in the market. This conclusion might be exacerbated by the fact that the European branch of the world‘s largest ETF promoter, iShares, holds 237.06 billion euros of AUM. This equals 49.00% of the overall AUM. If the European market does not work efficiently, such a concentration of AUM would lead to higher costs for investors and an overall lower number of ETF promoters because of high market barriers.

A closer look at the number of market participants and their product offerings shows a totally different picture. Despite the high concentration of AUM, the European ETF market seems to be very efficient and highly competitive; the management fees for ETFs that replicate standard indices have come down dramatically over the last few years. One example of this: ETFs replicating the EuroStoxx 50. In 2010 the management fee for these products was 19 basis points (0.19%) on average. At the end of October 2016 a number of products replicating the EuroStoxx 50 showed a management fee below 10 basis points (0.10%). One reason for the decreasing prices: the market entries of new fund promoters that want to make their products more attractive for possible investors by offering them at lower prices than the existing competitors. The reactions of the established ETF promoters to these price reductions were even bigger price reductions, which have led finally to increased competition in Europe. From my point of view this shows that the European ETF market has healthy competition and is open to new promoter entries.

That said, the falling management fees do lead to lower income for the ETF promoters, and some market observers question whether all or at least some of the ETF promoters in Europe are profitable. There are rumors that Source, the eighth largest ETF promoter in Europe, has been offered for sale by its parent company, Warburg Pincus, because it is not profitable.

Even though I personally do not believe all ETF promoters in Europe are profitable, the market seems to be very accommodative of new market entries. These market entries can be done in two ways: build a new promoter from scratch, or buy an existing promoter and use its existing infrastructure for ETF distribution and trading. Two examples of the different strategies that have been established over the past two years are First Trust and Wisdom Tree. First Trust has set up a new fund promoter, while Wisdom Tree bought the ETP promoter Boost and used its market access to offer ETFs to European investors. Since there are other fund promoters eyeing market entry into Europe, the takeover of an existing ETF promoter that is not profitable might become the strategy of choice for these new market entries. From my point of view it is clear that the promoter landscape in Europe will change, but at the end of the day I expect the number of ETF promoters in Europe to grow.

Even though the high concentration of AUM has not led yet to shortened competition in Europe, it can’t be concluded that this market status will not change in the future. It is important for external market observers to investigate as soon as possible the situation in the European ETF industry in order to alleviate possible concerns about competitive limitations and negative developments for investors in Europe.

The views expressed are the views of the author, not necessarily those of Thomson Reuters.


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