Smaller, New ETF Providers Try to Chip Away at ‘Big Three’

April 8th at 1:20pm by Tom Lydon

The exchange traded fund industry has been dominated by the three largest providers, measured by assets under management. The smaller providers and new entrants into the business must find a particular strength to make a name for themselves.

BlackRock iShares, State Street Global Advisors and Vanguard are the top three ETF managers, that together account for about 84% of the industry assets. PIMCO, Charles Schwab, Northern Trust and WisdomTree, to name a few, are competing amongst one another for the remaining 16% of industry assets, reports Randy Diamond for Pensions and Investments. [Fidelity-iShares Expand ETF Partnership: What Does it Mean?]

“Instead, the newer competitors have developed their own unique offerings, such as an ETF following a custom index designed to track diversified commodity exposure in the case of Northern Trust or an ETF version of the world’s largest bond fund in the case of PIMCO, said Ben Johnson, director of passive fund research at Morningstar Inc. in Chicago. Mr. Johnson said it would be difficult to compete with the big three on core ETFs,” Diamond wrote. [Richer Get Richer in ETFs - Harder for New Entrants?]

“They have a stranglehold on those products,” Johnson said.

For an ETF manager to become successful, they must gather between $50 million to $100 million in assets. Money managers are well aware of the capital that can be amassed with ETFs. For example, BlackRock, the largest ETF provider, with $566billion in AUM reported 29.5% of the $9.34 billion in revenue came from their ETF suite in 2012. WisdomTree, on the other hand, is the sixth largest provider of ETFs, but has had equal success. The manager has about $26.3 billion in assets under management, with $11 million in net profits in 2012. [Free Vanguard ETFs: Too Good to be True?]

PIMCO’s move into the ETF business has been closely watched. Its largest ETF, the PIMCO Total Return ETF (NYSEArca: BOND), is an actively managed product, an exception in a world where most ETF products are passive, reports Diamond.

“You’ve got one of the most successful fixed-income managers of all time offering a proven strategy that has outperformed for decades in an ETF wrapper,” Johnson said.

PIMCO enjoys global brand recognition, which helped the firm build ETF assets. It also has not hurt that the Total Return ETF has outperformed the mutual fund with the same strategy, said Deborah Fuhr, managing partner at ETFGI, a research and consulting firm in London. [ETF Sponsors, Index Providers in Uneasy Alliances]

“All those things have played to their advantage,” she said in the article.

In 2012, there were around 102 exchange traded products that closed up shop. This process is considered natural at this stage of the ETF industry. There are plenty of products to pick from, as a total of 178 new ETPs were launched during the same time period. The creation of a recognizable brand name is the single most important factor for success in the ETF industry. The heavy concentration of assets into a few providers can make it difficult in an industry where success can be determined in two years or less.

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.

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