Largest ETF providers may “skew” competition

The European ETF market remains the world’s largest in growth terms with double-digit expansion this year – but the industry could be highly uncompetitive, according to a top analyst.

The market has grown from the first European ETF launch in 2001 to 48 providers and 2,000 products with assets in excess of €500 billion today.

Detlef Glow, head of Europe, Middle East & Africa research at Lipper, said the numbers could obscure an inefficient and uncompetitive marketplace with assets heavily concentrated.

For one, Europe’s ten biggest ETF providers hold 92.6% of the continent’s assets. By definition, that means 38 of Europe’s providers, or nearly 80%, hold just 7.39% of assets.

“Such a high concentration of assets may suggest the largest promoters dominate the market and might be able to skew competition in the market – this conclusion could be exacerbated by iShares holding 49% of the European ETF assets,” Glow said.

However, Glow said the European ETF market is efficient on price, with management fees falling dramatically over the last few years. An example he cites is the EuroStoxx 50 ETFs, which had average management fees of 0.19 in 2010, a rate that has fallen below 0.10% today. This fall has been driven by price battles between large and small providers, an indication of the market’s effectiveness.

Nonetheless, Glow said falling management fees automatically led to lower income for ETF promoters, meaning the profitability of some providers is questionable. Glow referenced persistent rumours over the past year that Source, Europe’s eighth largest ETF promoter, had been offered for sale by its parent company.

“Despite this, the market seems to be very accommodative of new market entries. Market entries can be done in two ways; build a new promoter from scratch, or buy an existing promoter and use its existing infrastructure for ETF distribution and trading,” Glow said.

Glow pointed to two examples of these strategies: First Trust and Wisdom Tree. First Trust set up a new fund promoter, while Wisdom Tree bought exchange-traded products promoter Boost, and used its market access to offer ETFs to European investors.

Glow said takeovers of existing ETF promoters that were not profitable might become the strategy of choice for new market entrants.

“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,” he said.

©2016 funds europe



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