Today, $1.3 trillion in assets are held in more than 1,455 exchange-traded funds and other exchange-traded products. That is still dwarfed by mutual funds, which hold roughly 10 times as much. However, ETFs are on pace to set another record with $135.2 billion in net inflows so far this year, according to the ETF Industry Association.
That could eclipse the previous record year, when $175.7 billion was pulled in during 2008. Money still flows into ETFs nearly every week exit mutual funds that invest long-term in stocks. “ETF providers are becoming more attuned to the needs of their clients and have been adjusting their offerings to win new assets and trading volumes,” said Deborah Fuhr, co-founder and managing partner of ETFGI, a Londonp-based research and consulting firm.
But the ETF market is not wide open. The top three firms—BlackRock’s iShares, Vanguard andState Street’s S&P Depositary Receipts (SPDR) ETF unit—control around 70% of ETF assets worldwide. And investors new to placing assets in ETFs can be confused by the hundreds of smaller ETF firms that operate at a much smaller scale.
Here, Money Management Executive provides three perspectives from three players in this fast-growing market. One, the view from the top (BlackRock); two, an upand- comer (Charles Schwab& Co.); and three, a firm that has retreated for now (Russell Investments), but reserves the right to mount a comeback.
The Heavyweight—BlackRock’s iShares
Through the end of September, more than one-third of the $135 billion that have gone into ETFs this year, or roughly $50 billion, has flowed into iShare’s ETF products. The firm’s share of global ETF assets is more than twice that of its secondplace rival, State Street’s SPDR ETFs, according to global data from ETFGI.
Indeed, BlackRock’s ETF assets exceed those of its next seven rivals, combined, ETFGI’s count says. Is BlackRock’s dominance and growth sustainable? And does the firm have a strategy for the next rounds of the competition for new assets?
“Absolutely,” said Mark Wiedman, Managing Director and Global Head of iShares. “We feel very strongly that the combination of our iShares Core Series, which targets buy-and-hold investors and a campaign to refresh the powerful iShares brand are key components of our broader plan to drive even stronger growth in the U.S. and globally.”
Under the new initiative, launched in mid-October, iShares created iShares Core Series, a group of 10 lower-cost ETFs specially designed for the needs of long-term investors. BlackRock is hoping the ETFs in the Core Series—composed of four new and six existing iShares funds—will attract investors by offering lower fees than other firms, and frankly, other iShares products.
For example, the fees on the iShares Core S&P Total U.S. Stock Market ETF were slashed to 7 basis points, from 20 basis points before the initiative. The cost-cutting initiatives came just a week after rival Vanguard enacted its own some pricing cuts, moving away from using its long-timer supplier of investing benchmarks, MSCI,to a new provider.
iShares also plans an advertising blitz, including television ads, to target smaller retail investors and educate them about the uses of ETFs in their portfolios. All of this is designed to build on the firm’s strength in the sector, Wiedman explained. “As investors seek core portfolio products they can buy and hold for the long term, price sensitivity has become more important in this section of the ETF market” he noted. “By taking price off the table, the adjustments we are making allow our core building-block products to compete on quality alone.”
The move was a smart one for iShares because even a champion has to defend his belt if he is going to remain relevant, analysts said. “Total costs and performance are important but they only tell part of the story,” said ETFGI’s Fuhr, adding that ETFs have to satisfy investors’ desired product characteristics, such as benchmark, trading exchange and tax structure.