Big ETFs continue to attract billions of dollars as investors focus on the largest options on the market, which has left smaller fund competitors lagging further behind.
In the fund industry, the biggest products have quickly grown as investor assets increasingly find their way into mega funds. Consequently, some observers warn that this high concentration of assets in the largest funds could lead to increased risks.
“As investors entrust their money to fewer products, assets come under the control of fewer individuals, who ultimately make fewer but larger decisions,” Warren Miller, chief executive of Flowspring, a US data analysis group focused on asset managers, told the Financial Times. “This will lead to increasing volatility in financial markets, particularly in bear markets. Given that the main drivers of this trend show no signs of abating, we expect concentration to continue increasing.”
Big ETFs Enjoy Big Perks
The largest fund providers are able to benefit from economies of scale as they attract more assets and cut fees, which further fuels demand for these fund products. These providers can invest in technology that may further reduce costs and improve performance through effective data analysis. Additionally, they are also better positioned to meet rising regulatory costs.
Sean Collins, chief economist at the Investment Company Institute, the global trade body, found that 77% of assets are held in the cheapest quarter of mutual funds.
“What that means for smaller funds is they need to do something to reduce their fees or they need to find an area that is underserved or where they have expertise,” Collins told the FT.
Related: Cheap TIPS ETF Nets $1.2 Billion In Past Week
A similar investment trend is found in the ETF industry. ETFGI data revealed that fewer than 7% of ETFs charge 10 basis points or less but hold more than a third of total assets. Over half of ETF assets are held in those that charge 0.20% or less.
“Cost is a criteria people look at very early on in their decision making because it’s one of the easiest things to get data on,” Deborah Fuhr, managing partner at ETFGI, told FT. “Like when buying cornflakes, if all the products look the same and there is little difference in quality, consumers tend to go for the cheapest.”
For more information on the ETF industry, visit our ETF Performance Reports category.