In June this year, analysis by Lipper showed that 214 European ETFs had already been consigned to a so-called “Death List” meaning funds are likely to be under review for profitability reasons by their providers.
Industry getting smaller
Further evidence of the ETF industry consolidating further is Credit Suisse’s ETF business is hotly tipped to be moving under the iShares umbrella.
Leo Kranefuss was instrumental in the setting up of iShares back in 2000, and he has recently resurfaced at Warburg Pincus, according to the Financial Times this morning, with a remit to “evaluate opportunities for ETFs, index investing and asset management in Europe, Asia and Latin America”.
So with the amount of consolidation already being seen in the ETF industry what is it that Kranefuss can meaningfully provide investors?
As far as Europe is concerned, the answer is anything new and different that will add value for investors and not another series of meaningless ‘me too’ S&P and FTSE- tracking products.
There is the argument that the less competition there is will lead to a cartel and higher prices – the first iShares S&P 500 ETF, for example, came out with a charge of 40 basis points when it is now down to single digits – with any new entrant also coming up against the giants of BlackRock, State Street and Vanguard.
The Financial Times article also explained how Kranefuss last year set up ETF Opportunity Partners with former iShares colleague Rory Tobin. Tobin subsequently left for Barclays Wealth because “no deals followed” so hopefully the lessons learned will feed into whatever new propositions he builds.
Any homogenous product means that the only real competitive edge is price but economies of scale mean the move downwards from a nine basis point charge is going to be incredibly tough to drive. Hopefully Kranefuss and Warburg Pincus – and others – will look elsewhere and introduce similar propositions to, for example, the well-received S&P Dividend Aristocrats range.
High interest in high yield
High yield, dollar and euro products in particular, are ones that 7IM’s Peter Sleep would like to see, while others are looking for more bond-like exchange-traded products in general; emerging market bond ETFs could do with the competition to bring its costs closer to ten basis points than 50.
Jose Garcia-Zarate, a senior ETF analyst at Morningstar, suggests: “One area of potential growth is that of smart beta, which up until recently was the domain of a few small providers but now is attracting the attention of the big players.
“Up until now, fixed income ETFs have been bought by non-traditional fixed income investors. The challenge remains to tap into the traditional fixed income users/practitioners (e.g. pension funds, insurance companies, etc). Whoever manages to do that is potentially in for very substantial rewards.”
Maybe there is no need to go to the extremes of, for example, the iShares Lithium ETF introduced a couple of years ago, and investors should be wary of the too-actively managed products that involve double or triple-shorting, but in certain areas the introduction of a new product provider may not actually be a bad thing.