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May 5, 2019

Monday Morning Memo: Spotlight on the Concentration at the Promoter Level in the European ETF Industry

by Detlef Glow.

Investors, market observers, and regulators always raise questions about the competitiveness of the European exchange-traded fund industry since the assets under management seem to be concentrated among a few ETF promoters. Generally speaking, I would agree with the statement that one needs to be concerned if a few players are dominating a market, but not with regard to the European ETF industry.

The graph below depicts the fact that the European ETF industry is highly concentrated at the promoter level since the 10-top promoters in Europe held 93.22% of the overall assets under management (€725.2 bn) in the European ETF industry, while the other 41 promoters that have at least one ETF registered for sales in Europe only hold 6.78%. Even worse, iShares—the largest ETF promoter in Europe—accounts €335.2 bn, or 46.22%, of the overall assets under management. This is nearly as much in assets as the other nine of the 10-top promoters combined (€340.8 bn). In any other industry, such a high concentration should be concerning for regulators and clients, as this may lead to a monopoly or an oligopoly, which might bring prices up and/or the quality down.

Graph 1: Market Share (%) at the Promoter Level by Assets Under Management (March 31, 2019)

Market Share of the European ETF promoter

Source: Lipper from Refinitiv

Rather than the aforementioned scenario, we witness falling management fees and a very good quality of products with regard to their tracking of the underlying indices. In comparison to their actively managed peers, it needs to be said that the European ETF industry looks way more competitive than the European fund industry overall, since actively managed funds experienced increasing management fees, even as the concentration of assets under management is way lower than in the ETF space. That said, the ongoing discussion about the value added by active management and the high fees charged by the asset managers, in combination with the rise of popularity of ETFs, seems to drive down the overall costs.

In addition, new market participants are able to gather significant amounts of inflows on the ETF level, which means that the barriers to enter the market are not too high for new ETF promoters. Despite all of this, one needs to ask the question of whether all of the new market participants will be able to survive in such a competitive environment. With regard to this, it can be seen as a sign of the maturity of the market if an ETF promoter is absorbed by a competitor or is going out of business.

Talking about mergers and acquisitions, the still outstanding merger between Lyxor ETF and ComStage will increase the market concentration further, even as Lyxor ETF will maintain its position as third largest ETF promoter in Europe after the acquisition is completed.

In addition, the possible merger between DWS Group and UBS Asset Management (including the ETF business) could lead to a further concentration of the European ETF market, though it remains to be seen if the deal will happen at all. That said, this merger between the second largest ETF promoter (Xtrackers—with €78.5 bn in assets under management) and the fourth largest promoter (UBS ETF—with €50.8 bn in assets under management) may look massive at first glance. A more detailed view shows that it will not create a new rival for iShares as the most dominant player in the European ETF industry, but it will create a huge gap between the top three ETF promoters and the rest of the European ETF industry.

As I said before, I am not concerned about the current concentration of the European ETF industry since it is clear that there is strong competition between the different fund promoters, and the investors in Europe can enjoy some advantages from this competition. But I also see that the competition with regard to management fees allows for some creativity at the promoter level, as the majority of ETF promoters have implemented securities lending programs to earn additional income. These strategies are marketed as value-added strategies for investors, as the promoters do share the income from the securities lending with the investors. From my point of view, however, it is questionable whether these kinds of strategies should be used within investment products that are sold to retail investors.

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

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