Among traditional asset managers competing in the exchange traded funds industry, BlackRock (NYSE: BLK) is best positioned to benefit from the long-term growth of ETFs, according to Morningstar.
In what may go down as the financial services equivalent of the Boston Red Sox trading Babe Ruth to the New York Yankees, BlackRock acquired iShares, the world’s largest ETF sponsor, from Barclays (NYSE: BCS) in 2009 for $15.2 billion.
iShares now offers more than 700 ETFs globally with nearly $915 billion in assets under management. Of the 30 largest U.S.-listed ETF by assets, 13 are iShares funds, a group that includes the iShares Core S&P 500 ETF (NYSEArca: IVV), iShares MSCI EAFE ETF (NYSEArca: EFA), iShares MSCI Emerging Markets ETF (NYSEArca: EEM) and the iShares iBoxx $ Investment Grade Corporate Bond ETF (NYSEArca: LQD).
“The top three ETF providers continue to dominate the U.S. and global ETF markets. BlackRock/iShares, State Street(NYSE: STT), and Vanguard have effectively maintained a triumvirate, controlling 82 percent of the U.S. market and 70 percent of the global market. Morningstar equity analysts don’t expect much change in the near-to-medium term,” according to the research firm.
Morningstar notes of the asset managers that have entered the ETF business only BlackRock, the world’s largest asset manager, and Invesco (NYSE: IVZ) have had noteworthy success. Invesco is the parent company of PowerShares, the fourth-largest U.S. ETF issuer. PowerShares had nearly $100 billion in U.S. ETF assets at the end of the third quarter.
“BlackRock’s long-term AUM, with the company’s iShares ETF platform being the market leader in both the U.S. and global ETF markets. We expect iShares to continue to be the biggest growth driver for BlackRock in the near-to-medium term. Not only did the business generate $62.2 billion in investor inflows globally during 2013 (accounting for 56% of BlackRock’s long-term flows last year), but iShares is currently on pace to exceed that level this year, having picked up $56.5 billion in inflows since the start of 2014 (accounting for 60% of the firm’s long-term flows during the first nine months of the year),” said Morningstar in its Financial Services Observer published Thursday.
Over the past five years, shares of Invesco are up 88% while BlackRock is higher by 58.2%. The Financial Select Sector SPDR (NYSEArca: XLF) is up 70.2% over that period.
“Six different factors should drive domestic ETF growth in the near-to-medium term: the increased use of ETFs in the retail-advised market and by self-directed and institutional investors; the expansion of ETFs as core holdings for both retail and institutional investors; the expansion of the fixed-income market for ETFs; and the launch of new products,” according to Morningstar.
Earlier this week, BlacRock released its U.S. Institutional ETF Usage Report, which noted the “results show that institutional use of ETFs is expected to rise across the board. This trend holds true for both existing institutional ETF investors and those who do not currently hold ETFs.” [BlackRock Says Institutions to Continues Increasing Use of ETFs]
Strategic beta is expected to be another area of growth for ETF issuers in the coming years. Analysts believe that will benefit BlackRock and Invesco.
“The expansion of smart beta will benefit asset managers with businesses centered around smart beta the most. Invesco’s Powershares franchise, which offers smart beta ETFs, will benefit, as will Blackrock. Guggenheim may also benefit given the majority of its ETFs are based on non-traditional indexing,” according to a research note by Moody’s Investor’s Service in a note published earlier this year. [Smart Beta Boom Could Lift BlackRock, Invesco]
Illinois-based PowerShares has one of the oldest and largest lineups of smart beta ETFs, spanning industry, sector and international offerings, among others.
ETF Assets Under Management
Chart Courtesy: Morningstar
Tom Lydon’s clients own shares of EFA, EEM, IVV and LQD.