As ETF Inflows Reach Record Levels, Provider Competition Grows Fierce

Exchange-traded funds (ETFs) have been among the most popular and fastest-growing investment vehicles in recent years. According to a report by MarketWatch, ETFs saw total inflows of $450 billion in 2017. While 2018's figures may not reach quite as high – the report estimates that 2018 inflows will be closer to the levels of 2016, or around $200 billion – this is nonetheless a significant amount of growth for the industry over a relatively short period of time.

Along with the increase in the overall asset levels across the ETF space, there are also new funds launched every month. Investors can now choose between a growing field of rapidly diversifying approaches and strategies within the ETF space. At the same time, while the number of providers who launch these new funds has also expanded, two issuers in particular remain at the top of the flows rankings: BlackRock, Inc. (BLK) and Vanguard.

BlackRock's iShares and Vanguard

BlackRock (specifically the iShares unit within the investment management company) and Vanguard have seen an outsized share of net inflows for this year. CFRA Research Director of ETF and Mutual Fund Research Todd Rosenbluth indicated earlier this week that "iShares and Vanguard remain the top-two industry heavyweights and had gathered 73% of net inflows in the first ten months of 2018," per MarketWatch. While 73% of net inflows is a significant portion of all new assets, it's important to keep in mind the share that these two issuers maintain. Together, they enjoy 64% market share. In an industry valued at more than $3 trillion by some estimates, this translates to a tremendous amount of money.

That iShares and Vanguard dominate the ETF space is hard to dispute. As of Nov. 9, all of the top 10 ETFs according to new assets added year to date were provided by one or the other of these two issuers; six were iShares funds, and the other four were Vanguard funds. On the other hand, with market saturation comes intensified losses as well as wins: six of the ten worst performing ETFs this year (with regard to assets lost) are iShares funds. There are no Vanguard funds on that list.

The Importance of Fees

Although BlackRock and Vanguard dominate the ETF space, there are other providers that are surging in popularity and total assets under management, too. State Street Corporation's SPDR line of products is another major player, and relatively newer issuers like The Charles Schwab Corporation (SCHW) and JPMorgan Chase & Co. (JPM) are making inroads as well.

Competition among ETF issuers often comes down to two key factors: strategy or focus and fees. Because many of the ETFs from a provider like Vanguard will have rough (or even not-so-rough) equivalents with ETFs by iShares or other issuers, one way for an issuer to stand out is to find a niche strategy that others have not yet filled. The proliferation of funds is testament to the importance of this approach. Additionally, and perhaps even more importantly, ETF fees are a prime way for competing providers to try to beat their rivals.

There is one issue with the ETF fee battle, though: fees can only go so low. ETF fees have been trending downward for years, with many funds offering expense ratios below 0.20%. Given that providers still need to eke out a profit through the operation of these funds, and also considering how low expense ratios have already fallen, there may not be much more room to compete in this area. Of course, as expense ratios drop when providers compete with one another, investors believe that they are the primary beneficiaries, although there may be other fees involved in an ETF investment besides the overall expense ratio.

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