Just when you thought BlackRock Inc., the world’s largest asset manager, could not get any bigger, it did.
The announcement last month that it is to acquire the exchange traded funds (ETF) arm of Credit Suisse Group, Switzerland’s second-largest bank, will see the U.S. fund giant add a further $18-billion (U.S.) of fund assets to an already impressive $3.67-trillion.
But while the U.S. investment house’s asset pile grows ever larger, the Credit Suisse deal is said to mark the beginnings of a decline in the number of participants in the ETF market – particularly in Europe – and a spike in mergers and acquisitions.
Hector McNeil, a former managing partner at ETF Securities, the fourth-largest provider in Europe, who is now co-chief executive at startup Boost ETP, says he expects to see a 30-per-cent drop in the number of ETF providers in Europe, with bank-owned houses constituting the largest chunk of those exits.
The likes of BlackRock and State Street Corp., he says, will subsume the medium-sized issuers, “taking out the competition and increasing their market share considerably.”
“It was inevitable that there would be consolidation in the ETF market, both in terms of the number of providers and the number of products. We have been forecasting that for some time,” Mr. McNeil says.
In a market where all players look to provide investors with broadly similar outcomes – namely the efficient tracking of market indexes – it is natural for assets to congregate around a relatively small number of large companies, says Reinhard Bellet, head of passive asset management at Deutsche Bank AG’s asset and wealth management division.
But he thinks it is too simplistic to suggest that the Credit Suisse deal will be the trigger for a flurry of M&A.
“One transaction does not represent a game-changer for the market. There has been M&A activity in the ETF market in the past and there will no doubt be more activity in the future,” he says.
The worry, however, is if BlackRock’s purchase does signal the start of further consolidation then an already concentrated market will become ever more compressed.
Money held in all ETF products globally surpassed the $2-trillion mark last month, but almost 70 per cent of those assets are run by only three companies: BlackRock (including iShares), State Street, and Vanguard.
In Europe the picture is only slightly less skewed and, despite the presence of 46 providers, the top three companies by assets – iShares, Deutsche, and Lyxor, the Société Générale-owned ETF house – control just more than 60 per cent of the market (before the BlackRock purchase of Credit Suisse’s largely European business).
Apart from wiping out the continent’s fifth-largest provider, this deal increased the U.S. company’s share of assets to just less than 43 per cent, according to figures from ETFGI, the consultancy.
Unsurprisingly, iShares is comfortable with those numbers. Joe Linhares, head of iShares for Europe, the Middle East and Africa, says: “In any industry that is evolving it is not unusual to see some consolidation leading to greater efficiencies for investors. Without it, fragmentation can become an issue.”
This is what we see in the European ETF industry, he says, where there are “more than 40 providers and thousands of product listings, of which too many are based on the same benchmark.”
Gordon Rose, ETF analyst at Morningstar, the data provider, agrees. As ETFs charge very low costs, he says, “size is all that matters.” But he, too, does not think the Credit Suisse acquisition will have a drastic impact on this market.
“iShares was already by far the largest provider in Europe; it just became a little bigger. Market consolidation will be good for investors to some degree, as we have too many ETFs tracking the same [indexes].”
He adds, however, that if the market became too concentrated, or what he calls a “quasi-monopoly,” it would not be beneficial for investors either.
Deborah Fuhr, founding partner of ETFGI, points out the Credit Suisse deal means that three-quarters of “physical” ETF assets in Europe would now be controlled by iShares.
Physical ETFs, which invest in the underlying constituents of an index, were strongly favoured by investors in 2012, accounting for 88 per cent of inflows, while “synthetic” ETFs that use derivatives have declined in popularity, following criticisms of these instruments by regulators.
She says adding Credit Suisse’s physical ETF assets to that of iShares would give the BlackRock-owned provider a 74.6-per-cent share of the physical ETF market in Europe, based on year-end data.
Mr. Linhares says in response: “While competition is healthy and validates the ETF category, we think scale matters to clients as they want to know the firm is committed to the business.”