ARK Invest’s acquisition of thematic specialist Rize ETF could just be the first in a string of European ETF issuer buy-outs by US asset managers looking to enter the market, ETF industry commentators have said.
Cathie Wood’s firm announced the acquisition from AssetCo for £5.25m on Tuesday night, with ARK’s entry into Europe marked by Rize ETF being renamed ARK Invest Europe.
The deal will also see ARK and AssetCo partner to support ETF launches by AssetCo’s portfolio company River and Mercantile.
Ciaran Fitzpatrick, head of ETF solutions for Europe at State Street, predicted further acquisitions to be made in the European ETF market.
“The acquisition itself is no big surprise,” Fitzpatrick said. “I expect we will see further acquisitions by global asset managers to allow them enter the European ETF market without having to build a brand from scratch, which would be an attractive proposition if they can acquire an existing issuer at the right price.”
Meanwhile, Athanasios Psarofagis, ETF analyst at Bloomberg Intelligence, said the deal “gives life” to smaller ETF issuers in Europe that can be leveraged by US players.
“US firms are reluctant to go at it alone in Europe,” he said. “It is much easier to buy and link up with an existing platform. There are still many US holdouts.”
Michael O’Riordan, founder and managing partner at BlackRock Search and Advisory, who made the initial introduction between the ARK and Rize ETF teams, said there are “always opportunistic buyers and sellers out there” but arranging conversations between parties is challenging given “a lot of potential sellers have inflated valuation expectations”.
He added: “It is really only the smaller managers who are open to selling right now. For the mid-tier and larger managers this is not on the table.”
Disagreeing, Deborah Fuhr, managing partner and founder of ETFGI, said “lots of US issuers” are weighing their options on entering the European ETF market but this is not limited to acquiring smaller European providers.
“I would not be surprised if larger ETF businesses were also acquired,” she said. “Asset managers are under pressure to lower fees and create economies of scale so we could see some acquisitions in Europe on a much larger scale.”
The Rize ETF rationale for ARK
Looking at the parties involved in the recent deal, some might question why ARK opted to buy Rize ETF after AssetCo wrote down the ETF issuer’s value by approximately £5m in June with the business “materially behind plan”.
Kenneth Lamont, senior research analyst, passive strategies, at Morningstar, said ARK’s decision was not driven by wanting Rize ETF’s assets under management (AUM) – with only two of their ETFs housing over €100m – but instead to “gain a toehold in the European ETF ecosystem”.
Fitzpatrick noted acquiring Rize ETF allows ARK to enter the European market with a suite of existing ETFs which they can complement by launching their own active strategies.
“Our start of year predictions was that we would see further growth in the active ETF space and ARK entering the European market demonstrates the focus on active ETFs by issuers,” Fitpatrick continued.
“The active ETF space is at its infancy in Europe and therefore the perfect entry point for ARK, given their existing products in the US.”
O’Riordan described the acquisition as a “springboard” for ARK’s international expansion, with Rize ETF’s existing team helping mitigate the fact ARK currently has no “on the ground presence”.
He added the Rize ETF team would likely have more success with distribution as “the ARK brand is much stronger than the Rize ETF brand and with the personality of Cathie Wood, they will see interest”.
Less optimistic was Andy Merricks, portfolio manager at thematic ETF focused IDAD Funds, who said Wood’s brand had been “largely tainted” since the 2021-2022 sell-off and ARK reducing its Nvidia exposure ahead of the stock’s recent meteoric rise.
Looking at the UK market, he said: “I am not sure how widely known the ARK name is in the UK despite it being a big name in the US. Having said that, anything that can accelerate and improve the range of thematic ETFs in the UK can only be seen to be a good thing.”
Lamont said: “Arguably this move has come too late as the European ETF market approaches maturity and Cathie Wood’s star continues to wane. The acquisition is somewhat opportunistic and driven by attempts to stem persistent net outflows across the ARK range.”
“All but one of the US-domiciled ARK ETFs have bled money this year. Collectively net outflows exceed €620m year-to-date. By entering the European market, ARK will hope to expand the potential customer base for its existing strategies.”
Significance for Rize ETF and the rest of Europe
What the acquisition will mean for Rize ETF’s existing roster of ETFs remains unclear, with the possibility of product closures, mergers and the near certainty of active ETF launches.
O’Riordan said “a few” of the existing range may survive, however, many ETFs with less traction including Rize ETF’s pet care and cannabis ETFs could be chopped.
Fuhr said: “It is good to have both active and passive ETF offering so ARK could support those products. Active is a new phenomenon in Europe so it is good to have Cathie Wood, a high-conviction investor, to tell them what they should and should not do.”
Psarofagis said he expects ARK to lean more on their active roots and potentially expand the crypto offering being constrained by regulators in the US.
“I do not see a whole lot of potential in their current line-up. I would suspect ARK launches an ARKK type disruption ETF,” he said. “They could also see a bitcoin fund and I would even love to see a local fund, like a Europe disrupters ETF.”
Andrew Limberis, investment director at Omba Advisory & Investments, said a key positive for buyside participants could be newfound scale ARK might bring to Rize ETF products.
“Smaller and less liquid ETFs – from any issuer – are a challenge for many on the buyside for both good and bad reasons including wider trading spreads and the perception by end investors should the ETF close.
“For Rize ETF, this deal will hopefully generate additional flows which in turn may make their products more appealing to investors.”
However, ARK crossing the pond may also be a curtain call for some providers launching ARK mirror strategies capitalising on the asset manager’s delayed entry to Europe.
Lamont said the acquisition will be “unwelcome news” for Avanza, which launched the Avanza Disruptive Innovation by ARK Innovation this year for Scandinavian investors.
Meanwhile, Psarofagis pointed to the short and leveraged exchange-traded product (ETP) ARK tracker suite offered by Leverage Shares and the €2.5bn Nikko AM ARK Disruptive Innovation fund.
On the latter, he said: “This will really show if the ETF is the preferable wrapper – which I think it is.”
