Is the European ETF market competitive enough?
Plus: investment consultants have fingers too.
Everyone knows that the winner of a marathon doesn't get called five minutes into the race. We wouldn't be telling each other about the Hare and the Tortoise if things just tended to stay the way they started.
So, when news this week reported that JP Morgan Asset Management currently captures nearly half of the entire European active ETF markets, it wasn't hard to shrug and say: "Good for them."
"A pick-up in new entrants, launch activity and inflows belies the true picture, which is just three well-established mutual fund houses claim a dominant 53.8% share of the $32.9bn European active ETF market by the end of 2023, according to data from ETFbook.
In fact, Europe’s largest active ETF promoter, JP Morgan Asset Management, has alone cornered 42.5% of the market since entering in 2018 – with its $14bn active ETF assets under management (AUM) outstripping the scale of its nearest competitor by more than threefold."
After all, the market is still teeny-tiny. Back in December we talked about the falling concentration levels of the US ETF market and said:
"In a single year, BlackRock's market share fell from 33.7% to 32% (it was 39% five years ago). SSGA dropped from 17% to 15%. JPMorgan and Dimensional Fund Advisors went from near zero in 2018 to 3% of the market."
But, still, the ETF market is pretty concentrated. When is the right time for competition authorities to be asking questions? Because other parts of the ETF market are not so small anymore, but they're also not getting much more diversified.
If anything, some would argue they are become less competitive. Take thematic ETFs. Again from ETF Stream's Jamie Gordon:
"Smaller ETF issuers face a losing battle when taking risks on increasingly niche ETF exposures, only to be outmuscled and undercut on their best ideas by larger players including BlackRock."
The point being made is that larger players (err...player) are copying and undercutting smaller ETF issuers. VanEck's Europe CEO Martijn Rozemuller sees this as a form of validation for smaller teams. But HANetf co-founder Hector McNeil is saying large issuers are stifling creativity through quick copycat products:
“That is just the sign of a broken market, when you can be sixth to market and you are confident that you are still going to win,” McNeil said.
Here's what BlackRock would probably say:
One, that its thematic products are different. For example, although BlackRock recently launched a defence ETF, it has a very different exposure profile to existing products. Sure, it has entered the market third; but surely in a competitive market it’s good to have several different approaches to a theme?
Two, they have been calling for more competition since 2013!
Back then, BlackRock controlled almost half of assets. in European ETFs. Vanguard had only entered a year earlier, and collected a combined total of $2.5bn in inflows. The global head of iShares said at the time:
“One player cannot build the entire ETF market in Europe alone.”
Well, it's been over a decade since. Competition did enter the market, with fund houses now launching ETFs left, right, and centre. Yet, according to Morningstar data, BlackRock still holds over 40% of the European ETF market.
Was BlackRock the hare or the tortoise? Is ten years enough to tell?
Let's go back to JPMAM. Few fund houses have truly ventured into active ETFs just yet. And, at least at first, active ETFs will likely just wrap around active strategies that have already been successful — of which there are many.
Right now, JPMAM is definitely the hare.
But, judging by how things have unfolded with BlackRock, maybe it's not too early to start floating questions about competition.
Treasure corner: The big five-O
This week, SPDR S&P 500 ETF TRUST (SPY) made history as the first ETF to reach $500 billion in assets under management. In a spot of nice timing, this came shortly after the S&P 500 index also hit the 5,000s for the first time.
Let's play a game, where you first look at your hands, and then look again at that last paragraph.
We carry a lifelong attachment to numbers that are in 5s and 10s. Mindful of this, let's play a second game:
Say there are two funds, one managing 499 million dollars, the other 501 million. Does the difference matter much to investment consultants recommending funds to institutional investors?
According to a 2019 study, it matters a whole lot.
The research is titled Revealed Heuristics: Evidence from Investment Consultants’ Search Behavior (by Sudheer Chava, Soohun Kim, and Daniel Weagley).
The researchers used proprietary data from eVestment (a major fund data provider), to dig into investment consultants’ screening behavior. They found investment consultants frequently shortlist funds using threshold screens at numbers that are round, and are base 5 or base 10 numbers.
For example, when an AUM threshold is used:
Funds with AUM of $499m had a 44% chance of being eliminated
Funds with AUM of $501m had a 29% chance of being eliminated
The effect isn’t limited just to search behavior, it ends up trickling down to actual inflows. Funds just above the $500m threshold got up to 9% more flows over the next year compared to similar funds that were just below the threshold.
Also happening
Allocators focus too much on the buying, not enough on the selling. This according to Cabot Investment Technology, an advisor, which claims only 29% of institutional investors consider themselves disciplined in their selling. It’s a tricky story, this one.
On the one hand, Michael Ervolini, the former CEO of Cabot, is quoted saying useful things like "often investors hold onto stock well past its peak" and "by the time that they sell it the asset fetches far less than it could have." Also, you should look for your missing keys where you left them.
On the other hand, Ervolini is the former CEO of Cabot because Factset bought it in 2021, after which he served as a "distinguished fellow" at the company. So maybe he does know something about selling at the peak.While overall ESG bond issuance dipped, green bonds saw a 9.7% increase in 2023. ESG bonds come in several flavours, which differ in definitions, but more to the point, differ in naming: A number of studies looked into it, and ‘green’ just tends to sell better than ‘social’.
24% of supposedly eco-friendly article 8 funds face accusations of greenwashing. The lure of ESG status, but without the stricter regulations of article 9 funds, has led to a surge in article 8 products (up 20% in 2023). According to a study by MainStreet Partners, a quarter of funds classified as article 8
“Have done close to the bare minimum to classify as an article 8 product with a few negative exclusions and basic ESG integration.”
Speaking of S&P500 trackers hitting new inflow records, pharma company Indivior considers switching its primary listing from London to New York because it believes the switch would better "reflect" its "current and future prospects". True, nearly 50% of outstanding shares are currently owned by US investors. But one can also hope to catch a wave:
"Indivior argued the shift from London to the US would also allow the company to be included in the major US indices over time."
New York medical school eliminates tuition after $1bn gift, generated from decades of investing in Berkshire Hathaway. Everything here is feel-good:
"The gift to Albert Einstein College of Medicine came from Dr Ruth Gottesman, a former professor at the Bronx school. Dr Gottesman, now 93, began working at the school in 1968. She studied learning disabilities, ran literacy programmes and developed widely used screening and evaluation protocols."
Her late husband, David Gottesman, founded an investment house and was an early Berkshire investor. Upon his death, aged 96, he instructed his wife to "do whatever you think is right with it."
"I wanted to fund students at Einstein so that they would receive free tuition," Dr Gottesman said she immediately realised. "There was enough money to do that in perpetuity."