ETFs compete on more than just costs

The ETF market is maturing and there are an increasing number of ways providers are trying to set themselves apart from their competitors.

Overall, the ETF market remains buoyant: the February ETFGI’s Global ETF and ETP industry insights report showed flows into ETFs and ETPs rebounded in February, hitting $29bn (£17.4bn). This pushed overall assets within ETFs and ETPs to a new high of $2.44trn. Fixed income ETFs/ETPs were ahead, gathering $16.8bn with equity ETFs/ETPs gathering $10.2bn.

Although this would suggest an ETF market in rude health, the recent activity in the ETF sector has largely been around cost. The majority of advisers are using ETFs for the express purpose of driving down costs, so it makes sense that this is an important criteria, but the sector can often seem to be engaged in a race to the bottom. This is particularly true for ETFs based on the mainstream indices, such as the FTSE 100 or S&P 500, where there is a wide choice of providers.

However, Andy Clark, chief executive officer at HSBC Global Asset Management, says ETF providers can differentiate themselves in other ways: “If it were only about price, there would be a direct correlation between price and size, and that is not necessarily the case. Certainly, every basis points counts in the beta space, but there are differences in terms of physical versus synthetic replication, stock lending and index tracking. The decision-making is more complex.”

Physical replication appears to have won out against synthetic replication. According to data from Deutsche Bank, there is now €208.43bn (£172.57bn) in physically replicated ETFs in Europe, versus €91.17bn in synthetic replication and the gap is widening. Physical replication requires scale and BlackRock’s iShares range continues to dominate the market.

While it may not all be about cost, certainly many providers are now looking to higher-margin products to give balance to their businesses. The average total expense ratio (TER) of an ‘alpha’ ETF is 0.69 per cent, compared to 0.42 per cent for a ‘beta’-only product.

Mr Clark says that while the group has made a number of market-cap fund launches in the past year, the market is now well supplied and they are looking more towards ‘smart beta’-style strategies: “If you look at the institutional market, these type of strategies are already pretty big there. These re-cut the index to give different portfolio characteristics and might include economic scale indices, for example.”

At the same time, BlackRock registered the launch of two active US equity products at the beginning of April: the iShares Enhanced US Large Cap ETF and the iShares Enhanced Small Cap ETF. State Street Global Advisors has also launched a ‘Dividend Aristocrats’ series, based on the indices from S&P, which have proved popular.

For smaller providers that cannot compete on scale, they are offering either new, proprietary types of ‘smart beta’ or leveraged/short strategies. For example, Hector McNeil, chief executive officer at Boost ETP, believes the market in the UK will start to look increasingly like the US market: “There is currently $60bn (£36bn) in short and leveraged strategies globally, of which $10bn is in Europe.”

Mr McNeill believes that his natural market is those investors currently using contracts for difference (CFDs) and spread betting. He adds: “This type of product can be used to create more flexibility around a portfolio.”

Other groups to have come into the market include First Trust, a US ETF provider, which listed three LSE-listed ETFs in 2013, run using the group’s proprietary ‘AlphaDEX’ methodology. The group slices up a traditional index based on a number of fundamental characteristics, including different value and growth attributes, designed to create ‘alpha’ over the benchmark.

The ETF market may appear to be all about cost, but it has more sophistication than that. There are other ways that the larger fund houses differentiate themselves, and for newer, smaller groups a proprietary offering is essential.

Cherry Reynard is a freelance journalist

ETF PROVIDERS

Here is a snapshot of some of the biggest and smallest ETF providers currently operating in the UK in alphabetical order.

Amundi ETF

The Amundi Group offers a wide range of ETF products on the main European stock exchanges of NYSE Euronext Paris, Deutsche Börse, Borsa Italiana, SIX Swiss Exchange and the London Stock Exchange. It currently has 53 ETFs listed in the UK, covering global, Europe, sector and thematic equities. The first UK-listed ETFs were launched in May 2011 and it is estimated to be in the top five of European ETF providers, with total assets under management of approximately ¤12.2bn (£10.1bn).

Deutsche Asset & Wealth Management

With its db-X trackers ETFs, this is the second largest ETF provider in Europe, registering more than £30bn in ETF assets under management as at April 3, 2014. The first db-X trackers ETF launched in the UK in 2007, and there are currently approximately 190 offerings available to UK retail investors covering equities, fixed income, cash, commodities, currencies, credit, and multi-asset. There are roughly 122 equity ETFs and 47 fixed income offerings, including the recently launched global aggregate investment-grade bond market ETF.

ETF Securities

The company currently has 268 exchange-traded products listed in the UK, offering what it suggests is a comprehensive range of exchange-traded commodities. Aside from commodities, it also has vehicles covering equities, currencies and volatility. It launched its first UK-listed ETF in 2004, with the Gold Bullion Securities vehicle, and it currently has approximately $15.5bn (£9.3bn) assets under management in ETFs in Europe.

HSBC Global Asset Management

HSBC currently offers 26 ETFs in Europe with combined assets under management of roughly $3.9bn (£2.4bn). The company started managing ETFs in Hong Kong in 2003 and developed its European offering in 2009. Its vehicles are all physical, rather than synthetic ETFs and cover a variety of both developed and emerging equity markets.

iShares

Bought by BlackRock from Barclays in 2009, iShares is one of the biggest ETP providers in the UK, with its first launch in Europe on the London Stock Exchange in 2000. Assets held in iShares products across nine major UK platforms reached £1.05bn at the end of 2013.

Lyxor Asset Management

A subsidiary of Société Générale group, Lyxor Asset Management currently offers approximately 122 UK-listed ETPs covering fixed income, developed equities, emerging market equities, commodities and smart beta. It launched its first ETP in the UK in 2007 and it currently has approximately $46bn (£27.7bn) of assets in ETPs across Europe.

Vanguard

The company currently offers nine ETFs listed on the London Stock Exchange, including eight equity offerings and one fixed income vehicle. These cover UK government bonds, emerging markets, Japan, Asia, the UK, US and Europe. The first ETF was launched in the UK in May 2012, and the total assets under management in the nine strategies is roughly $5.3bn (£3.2bn).