Who's Winning The ETF Race?

January 05, 2010


First Trust
$1.7 billion in AUM
$11 million in estimated fees

Largest ETF: First Trust ISE-Revere Natural Gas Index Fund (NYSE Arca: FCG), $405 million

First Trust is a case study on how hard it is to build a core offering in the increasingly crowded ETF universe. The company offers a complete portfolio of quant-driven core products under its AlphaDex brand, but despite good recent performance, the funds have attracted little in the way of assets. As of Nov. 30, the largest AlphaDex fund had just $32 million in assets.

That’s left First Trust, like Claymore, nibbling at the edges. The firm’s largest fund is the $405 million First Trust ISE-Revere Natural Gas Index Fund (FCG), largely a corollary play for investors who sought an alternative to the besieged U.S. Natural Gas ETF earlier in 2009. Asset counts fall off from there.

First Trust needs to figure out a way to win investors over to its AlphaDex brand, and soon.

The Challengers

Together, the 14 firms covered above hold 99.2 percent of all ETF assets and earn 98.5 percent of all ETF fees. That leaves 21 additional firms fighting over less than 1 percent of investor assets, or more accurately, jockeying for position to grow.

Some of these smaller providers have big plans. Schwab, for instance, burst onto the scene this year by offering the lowest-cost ETFs on the market as well as free trading for all Schwab customers. While the Schwab ETFs have less than $200 million in assets right now, that number is sure to grow significantly in 2010. Look for Schwab to enter the top tier of ETF providers in a handful of years.

Another potentially big player is Pimco, which had about $430 million in assets scattered among nine funds as of the end of November. The company is planning an aggressive product rollout and, given its size, reach and reputation in fixed income, will likely attract significant assets in the years to come.

Other companies with big dreams for 2010 include ETF Securities, which is a dominant player in commodity ETFs in Europe with hopes to replicate that success in the U.S. IndexIQ, meanwhile, is betting that its line of “hedge fund replication” ETFs will eventually take off, while Emerging Global Shares is hoping investors will embrace its super-narrow emerging market sector funds.

Not all of these small-cap companies will make it. You might expect as many as half of these companies to disappear from the ETF scene over the next three years. But hidden among them also is probably a hidden gem, just waiting to catch fire and burst toward the top of the tier, as formerly small players like Van Eck have done.

It will be interesting to watch.


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