Acclaimed US drama
The Wire
might not be most people’s idea of a first port of call when looking at the concentration at the top of the ETF tree in Europe.
But one of the classic lines from the Baltimore-set gangs-and-guns binge-TV epic comes from the cult character Omar who, during one potential street ambush, warns his enemies “when you come at the King, you best not miss”.
It is a line which might hang in the air whenever a potential challenger considers their chances in taking on the big boys of the European ETF landscape – Lyxor, DWS’s Xtrackers and, of course, the true Omar of the bunch, BlackRock iShares.
The conundrum is this; Europe remains a growing market for ETFs and is materially behind the amount of AUM in the US (circa $832bn as of January this year compared to around $3.6trn).
This gap is only likely to close as there is more ETF take-up across the continent. Morningstar has predicted European assets will hit €2trn by 2024 meaning there is a lot to play for.
However, the top three in Europe control around three-fifths of the market with attractive and competitive offers, not least in terms of fees. Even those with deep pockets would think twice about attempting to muscle their way to the top table.
Hence, the rumours that have circulated around the potential sale of DWS and the availability of the Xtrackers franchise. What better way to gain market share than to buy it wholesale?
But is this necessarily the only route? The European market is nowhere near as concentrated as it is in the US where the top three – BlackRock iShares again, plus Vanguard and State Street – have a true stranglehold on the top end with a combined circa 85% market share.
There are some very well-known asset managers in Europe that have yet to take the ETF plunge in a concerted fashion. Many of these are tipped to make their entrance via either the smart beta or active routes and there is, as yet, no word of any of them hoping to take on the market leaders in the massive passive area.
Of course, there are reasons for this. The mass market is that much harder to crack and a failure to hit the mark will be very costly in terms of marketing and infrastructure. Make a go of an initial smart beta offering and, if successful, you have the opportunity at a later date to potentially aim higher. Make a misstep with a crack at the mass market and it could be all over.
But the issue here is not just about opportunity. It is about threat as well. The rise of ETFs is one symptom of wider changes afoot. The public discourse since the great financial crisis over 10 years ago is of an investing public which is less taken with the hype (and the fees) of active fund managers.
Passives (and ETFs as one of the main routes to that end) have risen in consequence. Now, while a lot of other factors are playing into the rise of smart beta, the emergence of active ETFs and other elements of the developing asset management landscape in Europe, it remains the case that if the gap between the US and Europe in terms of AUM is to close, it will be because of further take-up of truly passive offerings.
Active fund management might have not quite given up yet, but there are signs the battle has already been lost. Some big names have lost of ground in terms of AUM in recent years. There is very little sign of it coming back.
As the phrase goes, no-one ever said it was going to be easy and as hinted at in the opening of the article, the current market leaders will not take any push from a new entrant lightly. The marketing battle will no doubt be fierce and expensive.
However, compared to the US, the top end of the European market is much more open to some fresh blood duking it out. iShares aside at around €328bn, none of the rest of the top 10 gets above €100bn with the nearest being the potentially up for sale Xtrackers at around €80bn. Indeed, back in tenth position is German provider Deka with less than €10bn in AUM.
A sign of a market which is yet to truly solidify is M&A and the top 20 in the European list is filled with names (Invesco, ETF Securities, Legal & General) that have been involved in various buyouts in recent years. This is a sure sign that someone feels the market is up for grabs.
Time for a mass market asset grab? Potentially. And if others will not do it, those with existing ETF firepower will.
ETF Insight is a new series brought to you by ETF Stream. Each week, we shine a light on the key issues from across the European ETF industry, analysing and interpreting the latest trends in the space. For last week’s insight, click here.
