Many factors go into making a new ETF successful, and being from a well-established top-tier ETF issuer isn’t necessarily one of them.
That’s one of the key findings in VIRTU’s latest study into ETF asset trends.
A look at the 33 most successful ETFs to come to market in the past two years shows that almost 80% of these funds aren’t from any of the top five ETF issuers—iShares, Vanguard, State Street, PowerShares and Charles Schwab. (Success here is defined as a new ETF that’s gathered at least $200 million in assets in its first two years, is profitable, liquid and is performing well.)
From an issuer perspective, these top issuers certainly cast a long shadow, controlling some 88% of the more than $3.6 trillion in U.S.-listed ETF assets. Their dominance goes on unchallenged. But asset flows and asset growth over time show that, while the top five have remained at the top, market share has changed to the benefit of those that have made cost and distribution a priority.
ETF Issuer Market Share Over Time
Source: Virtu estimates
Consider the case of Vanguard. The giant mutual fund firm entered the ETF market relatively late, and to date, it doesn’t have a whole lot of ETFs compared with iShares, but it has a solid distribution platform, and it’s made its name synonymous with low-cost funds.
“Vanguard’s premise has always been low cost with distribution, which is Schwab’s premise as well. We can see that has helped them both grow into market leaders despite being late entrants,” said Phil Mackintosh, Virtu’s head of trading strategy and analysis. “These days, our trading desk often sees rotations into cheaper ETFs with similar exposure, so people are starting to compare performance with fees.”
“VWO [Vanguard FTSE Emerging Markets ETF] is a good case study for how much you have to discount a second-arrival ETF to get success,” he noted. “Some ETFs tried 15-20% discount to the leader, but VWO was about a third of the price of EEM [iShares MSCI Emerging Markets ETF] when it launched. That’s how much it took to start people switching one for the other.”
For would-be new issuers, Vanguard’s example offers important clues as to what it takes to make it in this business.
“One of the key findings here is that the percentage of success stories coming from nontraditional, non-Top-5 providers is pretty high,” Mackintosh said.