Exchange-traded Funds  

ETF market consolidation 'long way off'

ETF market consolidation 'long way off'
Leading players in European ETF market

The fragmented European exchange-traded fund (ETF) market has been tipped to become bigger before it gets smaller, as a wave of new entrants supersede the struggles of smaller players.

A report from ratings agency Morningstar said that the structure of the European ETF industry – in which distribution remains piecemeal and exchanges “cluttered” with numerous similar products – made it ripe for consolidation.

However, with more entrants gearing up to launch passive initiatives of their own, the agency has predicted that provider numbers will grow rather than contract.

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The latest sign of this trend came earlier this month, when JPMorgan Asset Management hired Invesco Powershares’ ex-Emea head to mark the start of its push into the market.

The Morningstar report, authored by the European passives research team led by Hortense Bioy, said: “Although such a market would appear ripe for streamlining, the long-predicted consolidation among providers and rationalisation of products has yet to materialise.”

“[The] market is cluttered with numerous offerings of the same exposure.”

The report said that in order to compete with the top firms – BlackRock’s iShares, Deutsche Bank’s db-X-trackers and Société Générale’s Lyxor – smaller providers are declining to specialise, instead seeking full product suites to satisfy the “geographically diverse” client base.

“This, in part, explains why the European ETF offering is larger than that of the US, despite being one fifth of the size in assets under management [AUM] terms,” Morningstar said, highlighting 12 providers that offered a EuroStoxx 50 tracker listed on one or more of the region’s 13 exchanges. “All the while, new players have entered the market.”

Some new players have decided to specialise in a bid to differentiate themselves. JPMAM said its primary focus would be the smart beta space, while BMO Global Asset Management, another recent entrant, has focused on income and bond products.

BlackRock dominates the European ETF market courtesy of a market share that has been edging closer to 50 per cent. 

This has not prevented a string of recent entrants, and more are set to follow. Fidelity and Franklin Templeton are expected to launch their first offerings shortly, according to the report.

“Despite all the talk of consolidation, the number of providers and products is likely to increase, with more asset managers, banks, and independents wanting a piece of the action,” Morningstar said.

But it noted 2016 was the first year in which fund closures and delistings “broadly matched” the number of new launches.

“This can be viewed as a healthy sign of market maturation. It appears that providers are becoming more willing to shut the doors on funds that fail to capture assets,” the firm said.

Morningstar estimated European ETFs had €550bn (£478bn) in AUM by the end of 2016, bringing the sector’s assets in line with the amount held by traditional tracker funds.