Mutual fund giant Vanguard popularized low-cost passive investing through index funds and now is a leader in the rapidly-growing market for exchange traded funds (ETFs), recently passing the $1 trillion mark in ETF assets under management (AUM). BlackRock Inc. (BLK), sponsor of the iShares family of ETFs, is the only other firm at that elite level.

The table below summarizes key facts about the competitive landscape in ETFs.

Key Takeaways

  • BlackRock, Vanguard, and State Street dominate the ETF market.
  • The SEC is concerned that these leaders may stifle competition.
  • New entrants fail to reach profitable scale at an increasing rate.

The Big 5 ETF Issuers

There are five issuers with $100 billion or more in ETF assets under management:

  • BlackRock: $1.554 trillion
  • The Vanguard Group: $1.008 trillion
  • State Street Corp. (STT), the sponsor of SPDRs: $640 billion
  • Invesco Ltd. (IVZ): $203 billion
  • Charles Schwab Corp. (SCHW): $142 billion

This data is as of June 27, 2019, per analysis performed by FactSet Research Systems and reported by ETF.com.

The Biggest ETFs

All 50 of the biggest ETFs, ranging from $17 billion to $268 billion in AUM, are offered by these five top issuers, per another table at ETF.com. The five largest funds are:

  • SPDR S&P 500 ETF Trust (SPY) from State Street: $268 billion
  • iShares Core S&P 500 ETF (IVV) from BlackRock: $182 billion
  • Vanguard Total Stock Market ETF (VTI): $115 billion
  • Vanguard S&P 500 ETF (VOO): $114 billion
  • Invesco QQQ Trust (QQQ): $75 billion

Among those 50 largest ETFs, BlackRock offers 22, Vanguard sponsors 18, State Street issues 8, and both Invesco and Schwab have one each. As passive index-linked ETFs became an increasingly popular alternative to index mutual funds, they represented a logical brand extension for Vanguard, which originated the index fund concept.

Factors Spurring ETF Growth

Persistent underperformance by active managers is spurring the growth of passive index funds and ETFs. A study of 4,600 U.S.-based equity, bond, and real estate funds with a collective $12.8 trillion in AUM revealed that only 24% beat passive alternatives during the 10 years ending Dec. 31, 2018, per Morningstar Inc. The same study found that passively-managed large cap equity mutual funds and ETFs surpassed active funds in AUM for the first time, as of the same date.

While ETFs are mainly viewed as a low-cost vehicle for individual investors, they also are gaining traction with institutional investors. Nearly 25% of institutional money managers' portfolios were in ETFs by late 2018, per research by Greenwich Associates. Professional investment managers are increasingly seeing ETFs as a cost-efficient tool for managing risk and making quick portfolio shifts.

Meanwhile, Vanguard has patented a scheme to reduce capital gains taxes on its ETFs, as detailed by Bloomberg. This process offers a competitive advantage, but Vanguard chooses to keep quiet about it, fearing regulatory action to curtail it.

Regulatory Concerns

The dominant combined position of BlackRock, Vanguard, and State Street is raising concerns among regulators, particularly those in the Securities and Exchange Commission (SEC), that they may be in a position to stifle competition, Barron's reports. Out of about $4 trillion in total ETF assets, these three firms control roughly 80%, a very high concentration ratio that might spark antitrust action.

 “I am concerned about what it will mean for investors--particularly Main Street investors--if the variety and choice offered by small and midsize asset managers become lost in a wave of consolidation and fee compression,” as Dalia Blass, director of the SEC’s investment management division, told the Investment Company Institute (ICI) conference in March, per Barron's. The ICI disagrees. “There is an opportunity for smaller entrants to launch and be successful, but it’s not a given,” as Shelly Antoniewicz, senior director of industry and financial analysis at the ICI, told Barron's. “It’s an ultracompetitive market,” she added.

Barriers to Entry

New entrants face challenges in complying with regulations and marketing their ETFs, with outside help often costing from $270,000 to $370,000 annually, plus a percentage of assets, per Barron's. “Until you get to that $30 to $50 million in assets, what you owe the service providers will not be covered by a management fee of even 50 basis points,” says Denise Krisko, co-founder of Vident Investment Advisory, a firm that helps new ETF issuers. “The clock starts ticking after launch, and time is money,” she adds.

In 2018, 268 new ETFs were launched, but 81% failed to reach $50 million by year-end. The number of new ETFs that must close in their first year because they fail to meet the typical $50 million cutoff for profitability has climbed steadily since 2003, per FactSet analysis cited by Barron's.