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 Malvern, Pennsylvania-based Vanguard has more than doubled its
market share to 21.3 percent since 2008, when it had just 8.6
percent. Vanguard has attributed its market share gains to low
pricing and to an effort to increase fund sales through advisers and
not just directly to individual investors.
By contrast, BlackRock and State Street have been giving up share
for years, with Black Rock falling from a 48 percent share at the
end of 2008 to 37.9 percent now, and State Street dropping from 30
percent to 22.7 percent in the same period, according to Lipper
data. The fourth- and fifth ranked providers, Invesco Ltd's
PowerShares and WisdomTree Investments Inc, also lost share.
Vanguard's 1.66 percent gain was more three times greater than its
next fastest growing rival, First Trust, which gained 0.5 percent.
BlackRock fell 0.97 percent in 2014 and State Street lost 0.31
percent of market share on the year, according to a Reuters data
analysis.
The changes in market ownership reflect ground gained from the rise
of newer entrants which have chipped away at the market share of the
biggest firms. There were some 62 U.S. providers at the end of 2014,
up from 36 just five years ago, according to data from ETF.com, and
industry observers say more are expected to join.
For ETF providers like State Street, PowerShares and WisdomTree,
market share changes can also be driven by a heavy concentration of
assets in a single fund or investing niche, said Morningstar analyst
Ben Johnson.
"They all have whales in their lineup," he said.
State Street's SPDR Gold ETF, which tracks the price of gold
bullion, had $3.2 billion in net outflows in 2014, while PowerShares'
massive QQQ Fund, which tracks the Nasdaq 100 index, had $11.3
billion in net outflows. WisdomTree's flagship Japan Hedged Equity
Fund, which tracks a basket of Japanese stocks and hedges for
currency fluctuations between the US dollar and the Japanese yen,
had $428.5 million in net outflows.
EFFECT OF PRICE WARS
The ascendancy of Vanguard has been a long, entrenched trend that
has "really accelerated" in the last couple of years, said
Morningstar's Johnson.
The flow of new ETF money stems from an effort the company initiated
three years ago to boost sales and support staff for advisers, said
Vanguard's Chief Investment Officer Tim Buckley.
"We recognized we needed to invest more in supporting advisers,"
Buckley said in a telephone interview. "That has built momentum and
we continue to be earning people's trust."
To be sure, the ETF space is expanding rapidly enough to give even
some share-losers record inflows, and BlackRock Chief Larry Fink has
said they anticipated losing market share given the growing number
of competitors and products over the years.
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"We never assumed those market share numbers would be permanent,"
when BlackRock bought Barclays Global Investors in 2009, he told
Reuters in an interview Thursday, noting they are more concerned
with flows than market share.
BlackRock has put more emphasis on marketing its pricier products
and less on winning the ETF price wars.
The changing pie is a sign to smaller firms, like relative newcomer
VelocityShares, which has already won $2.7 billion in assets since
2009, that they can elbow their way in. And it's a note to larger
ones that they might have to be more competitive in fighting for
investor assets by being more targeted with funds, competing on fees
or shaving inventory that doesn't attract assets.
BlackRock, for one, closed some 28 ETFs last year, the most for the
company in the past five years, while PIMCO shuttered 5 ETFs and
ProShares closed 17. Many of those funds were in niche areas or fell
on the pricier side of the pool.
"Fee pressure is an unstoppable force," said Edward Jones analyst
Jim Shanahan. Vanguard, which had the biggest market share gain in
2014, has an average expense ratio of about 0.14 percent, the lowest
among the top ten ETF providers, which average 0.52 percent.
But lowering fees can be a difficult tradeoff for companies who can
make as little as $1,000 per $1 million in assets on a low-fee fund
priced at just 0.1 percent in annual fees.
"They either keep fees where they are and continue to lose modest
amounts of market share year over year, or the alternative is to be
competitive on fees, which is ultimately bad for margins," Shanahan
said.
That may not matter much to participants who have watched the U.S.
ETF market grow rapidly to more than $2 trillion. But once that
universe stops expanding so rapidly, the competition could sharpen.
(Reporting by Ashley Lau in New York; editing by Linda Stern and
John Pickering.; Additional reporting by Tim McLaughlin in Boston
and Jessica Toonkel in New York)
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