[This article appears in our September 2017 issue of ETF Report.]
About a dozen or so years ago, it was easier for exchange-traded fund firms to establish themselves in the industry, carving out niches in areas like emerging markets and other sectors left untouched by the Big Three ETF providers: Vanguard, BlackRock and State Street Global Advisors.
Since then, the Big Three’s dominance hasn’t changed, but the number of second-tier ETF firms blossomed, particularly in the last few years. And they’re gathering assets. ETF.com’s July 2017 League Table shows more than 30 ETF firms have more than $1 billion in assets under management (AUM) and 15 have $10 billion plus. The top four have more than $100 billion each in AUM, with BlackRock at the top spot, with $1.2 trillion.
Creating ETFs in unexplored themes in equity markets is tougher now as the industry has matured. Still, ETF firm leaders say the strategies they’ve used to establish themselves in intervening years remain the same—offering innovative products in areas still relatively unpopulated by ETFs, and listening to client needs.
The ‘Alternative’ Firms
Unsurprisingly, they all said their focus is on creating good products rather than on being the biggest, preferring to be considered alternatives to what’s being offered by the Vanguards of the world. Some focus more on staying true to corporate culture, which may limit their AUM size. Some are aggressively seeking growth. If that helps them crack the top three, great, but they consider that sort of success more a byproduct than a goal.
Jonathan Steinberg, chief executive officer of WisdomTree, whose firm has $45 billion in AUM, says his firm stands out by offering what he calls a “differentiated vision.” Steinberg says WisdomTree pioneered the concept of self-indexing, meaning creating in-house indexes rather than licensing an index from a provider like S&P or MSCI. Self-indexing helps them bring products to market faster and have a better “feel” for the concept, he says.
To thrive in the ETF world, whether it’s against a BlackRock or a similar competitor, it’s critical to offer value and be a leader.
“We’ve established ourselves in smart beta, currency hedging and in liquid alts,” he said.
Steinberg says even though the Big Three have significantly more AUM than WisdomTree, “I don’t think they have an advantage over me.”
WisdomTree launched its first ETFs in 2006, and its goal over the next 10 years is to move from having 3% of asset flows to closer to 5-7%, which he says means the firm would have a half-trillion in assets. “I’ll never have more inflows than Vanguard, but that’s OK,” Steinberg noted.