Smaller ETF Firms Feeling the Heat Amid Consolidation
August 24th 2012 at 1:15pm by Tom Lydon
The exchange traded fund industry is facing pressure as the biggest providers are dominating assets under management. Some smaller players have been forced to close down funds or shut their doors as the industry consolidates.
“It has never been easy to be in this business, but the challenges have changed,” Ben Cukier of FTV Capital said in a recent report. “It used to be that advisers didn’t know what ETFs were, but now there are thousands of ETFs out there and the challenge is how to get the advisors’ attention.” [Russell to Shutter all Index ETFs]
The $1.2 trillion U.S. ETF market is currently dominated by the largest providers – BlackRock, State Street Global Advisors and Vanguard Group. Tighter margins, a flooded market and lack of more investment capital to get smaller funds off the ground are some of the challenges that the smaller players are contending with.
The mutual fund industry went through a developmental period similar to this years ago, reports Will Ashworth for InvestorPlace. As more investors look for liquidity and assets under management, only the biggest providers are able to continue to attract investor interest and capital. It is estimated that the big three players have about $1 trillion of ETF industry assets under management, or 83% of the market share. [Competition and Consolidation in the ETF Business]
The recent closing of Scottrade’s FocusShares, and Russell Investments ETFs, are examples of the smaller players feeling the competitive heat, and with this comes fewer choices for investors.
“ETF experts suggest this type of monopolistic competition creates lower prices because it’s the only way to gain market share when wooing consumers faced with choosing from three large competitors with no discernible differences,” Ashworth wrote. [Sec Warns on ETF Risks]
The danger of smaller ETF providers shutting their doors, or consolidating, is that the choices will be less varied for investors and prices could be affected.
Tisha Guerrero contributed to this article.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.