For most market observers there is no doubt the European exchange-traded fund (ETF) industry is a high-growth industry, since it is still enjoying—even after 16 years of existence—double-digit annual growth rates. The assets under management (AUM) have grown since the first ETF in 2001 from zero to 514.48 billion euros as of December 31, 2016. Even though the market for ETFs in Europe—with 2,099 products issued by 48 ETF promoters—seems quite efficient and accessible by new promoters, one needs to examine the industry in more detail to see if that assumption is true.
As of December 31, 2016, there were 48 ETF promoters active in Europe, offering 2,099 products (all share classes) to investors. This number of products and promoters would normally mean the AUM would be broadly diversified over different products, asset classes, and promoters, with no unusual concentration at the product and promoter level. But the AUM distribution in Europe as of December 31, 2016, showed a totally different picture.
Graph 1: Market share of the ten top ETF promoters by assets under management (December 31, 2016)
Source: Thomson Reuters Lipper
The concentration of AUM at the promoter level was very high; the ten top promoters held a total of 477.20 billion euros or 92.75% of the overall AUM in the European ETF industry. This meant the other 38 ETF promoters accounted for only 7.25% (37.28 billion euros) of the AUM in Europe. Such a high AUM concentration may lead to the conclusion that the largest promoters dominate the market and might be able to skew competition in the market. This conclusion could be exacerbated by the fact that the European branch of the world‘s largest ETF promoter, iShares, holds 250.61 billion euros of AUM. This equals to 48.71% of the overall AUM, far above the following promoters: Deutsche Bank’s db x-trackers (53.30 billion euros or 10.36% of the overall AUM in Europe) and Lyxor ETF (51.03 billion euros or 9.92% of the overall AUM in Europe).
Graph 2: Assets under management of the ten top ETF promoters (in Billion Euros) (December 31, 2016)
Source: Thomson Reuters Lipper
But if the European market did not work efficiently, such an AUM concentration could lead to higher costs for investors and an overall lower number of ETF promoters because of high market barriers.
A closer look at the number of market participants and their product offerings shows a totally different picture. Despite the high AUM concentration, the European ETF market seems to be very efficient and highly competitive. The management fees for ETFs that replicate standard indices have come down dramatically over the last few years. One example: ETFs replicating the EuroStoxx 50. For 2010 the management fee for these products was 19 basis points (0.19%) on average. At the end of December 2016 a number of products replicating the EuroStoxx 50 showed a management fee below 10 basis points (0.10%). One reason for the decreasing prices: the market entries of new fund promoters that want to make their products more attractive for possible investors by offering them at lower prices than existing competitors. The reaction of the established ETF promoters to these price reductions was even bigger price reductions, which led to increased competition in Europe. From my point of view this shows the European ETF market has healthy competition and is open to new promoter entry.
That said, the falling management fees do lead to lower income for the ETF promoters, and some market observers question whether all or at least some of the ETF promoters in Europe are profitable. Therefore, it is not surprising that some parent companies such as Warburg Pincus, which offers Source and is the seventh largest ETF promoter in Europe, are trying to sell their ETF business.
Even though I personally do not believe all ETF promoters in Europe are profitable, the market does seem to be very accommodative of new market entries. These market entries can be done in different ways, with the two most common being: build a new promoter from scratch, or buy an existing promoter and use its infrastructure for ETF distribution and trading. Two examples of the different strategies established over the past two years are First Trust and Wisdom Tree. First Trust has set up a new fund promoter, while Wisdom Tree bought the ETF promoter Boost and used its market access to offer ETFs to European investors. Since there are other fund promoters eyeing market entry into Europe, the takeover of an existing ETF promoter that is not profitable might become the strategy of choice for these new market entries. To me it is clear that the promoter landscape in Europe will change, but at the end of the day I expect the number of ETF promoters in Europe to grow.
A third way to launch an ETF promoter would be under the roof of an existing fund promoter the way Franklin Templeton and Fidelity are doing. Even though they have to build the trading infrastructure for their ETFs, they can use their existing access to asset managers for the distribution of the new products.
Even though the high AUM concentration has not led yet to reduced competition in Europe, it can’t be concluded that this will not change in the future. It is therefore important for external market observers to investigate the situation in the European ETF industry as soon as possible in order to alleviate possible investor concerns about competitive limitations and negative developments.
The fund flows over the year 2016 showed even higher concentration; the ten top ETF promoters gathered 46.54 billion euro of net inflows over the year, equaling 112.31% of the overall net flows. Even though it is not surprising that the ten top promoters gathered more than 100% of the overall flows, the concentration of the flows at the promoter level was. iShares was the best selling ETF promoter and gathered 26.62 billion euros, while the second best selling promoter Vanguard enjoyed inflows of only 4.28 billion euros, followed by State Street’s SPDR (4.23 billion euros), Amundi ETF (4.13 billion euros), and UBS ETF (2.89 billion euros). These numbers show that flows in the direction of the market leaders are still dominating the market.
Graph 3: Net fund flows of the ten top ETF promoters in Europe (in Billion Euros) for 2016
Source: Thomson Reuters Lipper
In this regard, it might become harder for new market entries to gather enough net flows to become profitable, if they can’t offer products with competitive pricing and good accessibility for investors. Also, these products will need to have a unique selling point such as the so-called smart beta products offer, since this could possibly raise the demand for the products.
The views expressed are the views of the author, not necessarily those of Thomson Reuters.