US ETF Industry: Ch-Ch-Changing

Small tremors in the ETF industry are starting to add up.

Reviewed by: Drew Voros
Edited by: Drew Voros

I was debating between Bob Dylan’s “The Times They Are A-Changin'” and David Bowie’s “Changes” (“Ch-ch-changes” refrain) to be the soundtrack for this ETF industry blog. Becoming musically aware in the 1970s, I’m much more of a Bowie fan.

Bowie represented more of the future to me, and that’s where I’m going with this. “Changes” is more appropriate when explaining what I think is changing in the ETF industry. Change as in declining fees, change in the player, the who's who in this business and the who's taking over whom in recent weeks. Change is the only path forward. 

Bowie also starred in the sci-fi movie, “The Man Who Fell To Earth,” which, as I think about it more and more, is an analogy for the “Investment Fees That Fell To Earth.” Cheap cost is what’s behind the ETF phenomenon that’s changed how people invest, save, trade, advise, etc. But those cheap costs have had an impact on the ETF industry as well.

With assets in U.S.-listed ETFs now above the $3 trillion mark, the industry has certainly matured, and as anything gets older and bigger, it changes. The ETF industry is in a new period of change, and over the last few weeks, there’s been confirmation of that.

Foreign Buyers Circle

Sticking with the David Bowie soundtrack, it’s time to switch to one of his greatest hits: “My China Girl.” We just had our China moment in the U.S. ETF industry. Two deals in a week resulted in two U.S. ETF issuers being bought by Chinese firms, and this to me is not trivial.

Earlier this month, ETF issuer KraneShares, which has $827 million in ETF assets in the U.S., said it signed an agreement to sell a 50.1% majority stake in the company to China Investment Capital Corp. (CICC), a China-based financial services firm with subsidiaries in New York, London, Hong Kong and Singapore.

KraneShares is a fairly small boutique-style ETF issuer, offering only five funds and barely scraping into the top 40 U.S.-based ETF issuers in terms of assets under management (AUM). However, the firm has a laserlike focus on China.

The acquisition by CICC will lend the small ETF issuer some big-time firepower when it comes to resources and research, but it also gives CICC an entry into the exploding U.S. ETF market.


Hong Kong Firm Buys Alerian

Following that, there was another deal involving a U.S. ETF issuer and a Chinese firm. ZZ Capital International, a Hong-Kong based firm, agreed to buy U.S. index provider and ETF issuer Alerian in a deal Reuters reports to be more than $800 million.

While more of an index provider than ETF issuer, Alerian runs the largest master-limited partnership ETF, the Alerian MLP ETF (AMLP), which has just over $10 billion in assets, as well as the Alerian Energy Infrastructure ETF (ENFR), with a fraction of AMPL’s assets, at $36 million.

Like KraneShares’ direct focus on China, Alerian has built its reputation on energy-related, master-limited partnership indexes. It’s a pretty simple sales pitch, or reason for attraction.

London Firm Buys Janus

The last ETF issuer to be bought was in October 2016, again, by a foreign buyer. London-based asset manager Henderson Group agreed to buy U.S. rival and ETF provider Janus Capital Group in a $6 billion deal. Although a tiny player in the ETF industry using the Janus ETF brand, the firm also owns VelocityShares, which has 19 levered and inverse ETFs with a total of more than $3 billion in assets.

While Henderson may not have bought Janus because of its ETF businesses, the companies said at the time of sale this would help both firms cut costs. Falling fees are impacting the business models of asset managers, from top to bottom.

This may be prompting the idea for some ETF issuers to sell now, because the grind is going to get grittier.

Top Of The Food Chain

The largest ETF issuer under the iShares brand and the largest asset manager in the world, BlackRock, is highly unlikely to be bought, but who knows? With more than $5 trillion in AUM and more than $1 trillion in U.S.-listed ETF assets, the firm is the dominant player in the ETF space.

iShares took in nearly half the $250 billion in new U.S.-listed ETF assets for the first six months of the year, but the firm this month reported less-than-expected revenues for the past quarter. The firm has seen a move away from its more profitable active management business clearly into its low-cost ETFs.


Earlier this year, BlackRock began implementing more algorhythmic tools on its active manager side, leading to headlines that implied the firm was replacing humans with robots in a cost-cutting move.

BlackRock CEO Larry Fink has disputed that characterization, saying in April: “We’ll have the same amount of employees in our equity division a year from now than we do today.”

But even at the top of the ETF food chain, their changes on the business models on investment cause their costs to fall to earth.

Success Bring Succession

Also this month, there was some big executive news at Vanguard. Chief Investment Officer Tim Buckley was named president and director of the index fund giant. As of Jan. 1, 2018, he will also succeed Bill McNabb as only the company’s fourth chief executive officer since it was founded in 1975.

Vanguard is the second-largest ETF issuer, with $736 billion in AUM in its 70 ETFs. It was the first firm to promote index funds for retail investors, with the Vanguard 500 serving as its flagship product. Across all its products—which include more than 300 mutual funds and ETFs—the firm manages nearly $4 trillion.

When McNabb took the CEO reins in 2008, the firm’s total AUM was around $1 trillion. Clearly the firm has been on a roll under his leadership, and there’s nothing really that’ll stop the momentum of investors flocking to the not-for-profit asset manager.

While Vanguard has been said to be eyeing Europe for its next leg up in growth, here in the States we can expect the company’s ETFs to continue to see their fees fall as its funds’ assets build. That’s the way they’re designed, which is a business model that will never change.

Drew Voros can be reached at [email protected]


Drew Voros has nearly 30 years' experience in financial journalism. He was a longtime business editor for the Oakland Tribune and sister papers of the Bay Area News Group, and finance writer for the Hollywood trade publication Variety. Voros' past roles have also included editor-in-chief at and ETF Report.