[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.
Visibility & Availability Are Key
It takes more to be innovative now than it did when Guggenheim Funds first launched its S&P 500 Equal Weight ETF (RSP) in 2003, an early smart-beta ETF, and that’s to be expected as the market evolves, says Bill Belden, Guggenheim Funds’ managing director and head of ETF Business Development for Guggenheim Investments.
Heightening product visibility to the market and education is key, he notes, and getting their funds on commission-free platforms like Schwab’s ETF OneSource and Pershing’s FundVest is part of that.
“That increased availability and visibility is one key part in how we set ourselves apart in terms of some of the other sponsors,” Belden said, who notes the firm’s current $36.17 billion in AUM is a record for them.
Guggenheim sees its future in the active fixed-income space, a $39 trillion market that has only $17 trillion following the Bloomberg Barclays Aggregate Index, the main fixed-income index. “The cheap beta providers generally track something like the Agg, so it’s a great opportunity for active fixed-income providers to offer something,” he added.
Michael Sapir, chief executive officer of ProShares, a firm with $33 billion in AUM, says that being a privately held specialty shop gives them an advantage over other firms: It allows them to be nimbler in making decisions, but also to take a longer-term view versus being worried about what’s happening quarter-to-quarter.
“We’re not really held to what has been done before in the industry. We challenge conventional thinking and ways of doing things. That’s allowed us to be as successful as we’ve been,” he said of the 11 years ProShares has been in the industry.
ProShares also sees growth in the interest rate sector, building on successful launches such as its UltraShort 20+ Year Treasury ETF (TBT), an inverse bond fund. The firm just launched a fund that invests in sectors and companies that historically benefited from rising interest rates, its Equites for Rising Rates ETF (EQRR), Sapir notes.
Scale & Growth
Two ETF firms—PowerShares and Charles Schwab Investment Management—have scale and ambitious growth plans. While neither says that knocking one of the Big Three from their thrones is a direct plan, they do want to be known as dominant ETF providers, and if it means moving up a notch on the list, all the better.
“We absolutely see ourselves broadly as one of the biggest players in ETFs in the industry … and CSIM [Charles Schwab Investment Management] as being a key component of that,” said Jonathan de St. Paer, senior vice president and head of strategy and product for CSIM, whose ETF AUM total $80 billion.
When it launched its ETFs in 2009, its strategy was, and remains, to be focused on core portfolio products. These products would be easier to scale efficiently, and Schwab could offer them at a low cost, St. Paer says.
“We started our focus saying that because we don’t need to be all things to all people, we want to do a limited number of things and do them really well,” he noted.
That includes a mix of ETFs with market-cap index exposure, traditional passive indexes, and fundamental indexing, all of which can play a core role in a portfolio, he adds. Getting the word out about Schwab ETFs is another part of the strategy, and St. Paer says it seems to be working, noting the firm had record flows and assets for the first half of the year as well as the second quarter.
PowerShares Looks To Grow Beyond No. 4
Dan Draper, head of the business for PowerShares, the fourth-largest U.S. ETF provider, says it will soon have $150 billion in AUM (pro forma) once its acquisition of European ETF provider Source closes in the third quarter. And that’s not even including PowerShares’ possible acquisition of Guggenheim and its $37 billion in AUM. [Draper declined to comment on the rumored acquisition during our interview.]
Draper says part of PowerShares’ success comes from being able to offer ETFs for full asset allocation purposes, from equites to fixed income to commodities.
Overall, 70% of PowerShares’ funds have track records of five years or longer, including its fundamental indexed funds based on its partnership with Research Affiliates. Those date back to 2003 and experienced the 2008 market crash, which Draper notes sets them apart from the newer competitors in particular.
“You can really see a battle-tested, battle-hardened product range,” he said.
PowerShares has ambitious plans, Draper notes, including expanding the smart-beta products and non-U.S. growth. The Source acquisition will put it in the top 10 biggest ETF providers outside the U.S., giving greater opportunity to scale up the business.
“I don’t want to make outlandish statements; the three players in front of us obviously are formidable competitors … . We’ll continue to push forward with what’s right for our clients, and we think AUM and market share growth are a byproduct,” he said.