The ETF triopoly's domination of the asset management space, in which BlackRock Inc.’s (BLK) iShares, Vanguard Group, and State Street Corp.'s (STT) Global Advisors control a whopping 80% of the market with 600 products, could threaten the growth of the industry, and is now the focus of the Securities and Exchange Commission (SEC). The SEC has announced an “outreach initiative,” in which it aims to gain insight from smaller money managers and will potentially launch an advisory committee, per a recent Barron’s report.
Triopoly Crowds Out New Entrants
- Three firms hold 80% of ETF assets in 600 products
- Out of 268 ETFs begin in 2018, 81% failed to reach $50 million by year-end
- ETF launches to closures is now at a 1-to-1 ratio
Only 19% of New ETFs Hit $50 Million in 2018
Because of the trio's crushing dominance over the $4 trillion industry, ETF launches have dwindled and closures have risen. The ratio of ETF launches to closures is now 1-to-1. The other 1,600 ETFs managed by over 100 companies have been struggling to attract clients in light of the big three’s well-known, tried-and-true line of products at hard-to-beat prices, per Barron’s reporter Crystal Kim.
The amount of new ETFs that have been unable to gather as much as $50 million in assets, a traditional benchmark for profitability, as well as the number of those that have closed within the first year, has steadily climbed over the past 15 years plus, says Elisabeth Kashner, director of ETF research at FactSet. In 2018, the industry saw 268 new ETFs, with only 19% of those hitting the $50 million milestone by Dec 31.
Barriers to Entry
Other challenges facing new entrants are the unique costs, regulations and barriers to entry in the ETF space. Firms who employ help in navigating the process see costs run as high as $370,00 a year, plus an annual percentage of assets. Meanwhile, as in any industry run by a few giants with deep-pockets and brand loyalty, the winners have a significant amount of pricing power, which often calls for competitors to differentiate themselves with riskier strategies.
Another major hurdle is the process of getting new ETFs on sales platforms, known as distribution, which causes a barrier to potential customers. Tony Barchetto, founder of Salt Financial, argues that big brokerage firms like Morgan Stanley and Bank of America Merrill Lynch are “sales engines for the likes of BlackRock and Invesco,” and “put up gates” for other players.
The hurdles facing smaller firms and the stronghold that the big three maintain over the market have raised concerns over industry innovation and growth.
In a keynote speech at the Investment Company Institute conference in March, Dalia Blass, director of the SEC’s division of investment management, indicated that, “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.”
The SEC's inquiry will focus on the same trio that pioneered the industry's growth, but now pose a major risk to its future. Meanwhile, some industry insider say that there is no more competition in asset management than any other space. Shelly Antoniewicz, who represents the ICI, the fund industry’s lobbying group, noted, “it’s an ultra competitive market. That’s any market -- autos, food -- it goes on.” She added that “there is an opportunity for smaller entrants to launch and be successful, but it’s not a given.”