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. However, this is not the case when it comes to the European ETF industry.
Graph 1 shows that the European ETF industry is highly concentrated at the promoter level since the 10-top promoters in Europe held between 93.25% (June 30, 2023) and 94.63% (June 30, 2020) of the overall assets under management in the analyzed period. This means that it looks like the market share of the 10-top promoters is decreasing since the peak in June 2020.
Meanwhile, the overall assets under management increased from €829.8 bn to €1,410.3 bn over the same period, while the assets under management of the 10 largest ETF promoters in Europe increased from €785.2 bn to €1,318.9 bn. In addition, it is noteworthy that the number of ETF promoters with at least one ETF registered for sale in Europe increased from 46 to 50 despite some mergers of promoters in the analyzed period.
Graph 1: Market Share (%) at the Promoter Level by Assets Under Management (June 30, 2015 – June 30, 2023)
Source: LSEG Lipper
Even worse, as graph 2 depicts, iShares—the largest ETF promoter in Europe—accounted in June 2015 and June 2016 for more assets under management than the other nine of the 10 largest ETF promoters in Europe combined. June 2017 marked the first analyzed period in which iShares did not hold more assets under management than its top competitors combined—it lost further ground up until June of this year.
Despite the fact that iShares’ market share compared to the combined share of the other nine promoters in the top 10 has declined over the analyzed time period, it has maintained a very dominant market position. In any other industry, such a high concentration would be concerning for regulators and clients since this could lead to a monopoly or an oligopoly. Such a development could bring prices up and/or quality down.
Graph 2: Market Share (%) iShares vs the Combined Other Top Nine Promoters by Assets Under Management (June 30, 2015 – June 30, 2023)
Source: LSEG Lipper
Looking more closely, it would require a merger of the next eight largest promoters to create a new rival for iShares as the most dominant player in the European ETF industry. Such a move, however, would create an even larger gap between the two-top ETF promoters and the rest of the European ETF industry. This would be even more concerning when it comes to the competitiveness of the European ETF industry.
Rather than the aforementioned scenario of increasing management fees, we see falling management fees and a very good quality of products which closely track their underlying indices. In comparison with their actively managed peers, it needs to be said that the European ETF industry looks way more competitive than the European fund industry overall. This is because 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 active managers, in combination with the rise in popularity of ETFs, seems to drive down the overall costs in this market segment.
At the same time, the falling management fees for core markets are a concern for some market observers since they see the current fee levels for core products as a barrier to entry for new ETF promoters in this segment.
The high competitiveness of ETF promoters in Europe has led to a high product quality to meet the expectations of professional fund selectors who expect close index tracking, low management fees, and value when it comes to total expense ratios.
One could argue that the competition in the industry drove prices down to a point where only asset managers with decently scaled products could earn money. Even worse, large ETF promoters could subsidize core products over a given time period to gain a competitive advantage over smaller promoters who might not be able to afford such a pricing policy. This is especially true for the so-called core markets, as these markets are by nature those markets which are attracting the most investor money. Scaling by large ETF promoters can foster a further market concentration since new ETF promoters may rather launch niche products to avoid the competition with the market leaders in the core markets.
Nevertheless, new market participants are able to gather significant amounts of inflows at the ETF level, especially with innovative investment solutions for core and niche markets. This means that the barriers to enter the market are not too high for new ETF promoters. Despite all of this, one needs to ask whether all of the new market participants will be able to survive in such a competitive environment. 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.
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. European investors can enjoy some advantages from this competition. More generally, the European ETF industry can be described as an industry with low barriers for entry, but with high barriers for success, since it is not enough to list an ETF on one or more exchanges to take profit from the overall market trends in Europe.
But I also see that the competition around management fees allows for some creativity at the promoter level since the majority of ETF promoters have implemented securities lending programs to earn additional income. These strategies are marketed as value-added strategies for investors since promoters share the income generated by securities lending with investors. Nevertheless, revenue sharing models have come under scrutiny, as market regulators have started to watch these practises. From my point of view, however, it is questionable whether these kinds of strategies should be used within investment products sold to retail investors.
The views expressed are the views of the author, not necessarily those of Refinitiv or LSEG.