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New report from Bloomberg Intelligence underscores why BlackRock and Vanguard could dominate ETFs for years


A new report from Bloomberg Intelligence (BI) has concluded that Vanguard and BlackRock are in a league of their own in terms of assets and flows. BI doesn’t expect this to change anytime soon, given that financial advisers see both Vanguard’s and BlackRock’s low fees as providing job security – akin to buying IBM shares in the 1980s, says BI. A recent industry survey found that advisers’ most important factors when selecting an ETF are expense ratio and the issuer’s brand, adds BI.

Eric Balchunas, BI Senior ETF Analyst, and Athanasios Psarofagis, BI ETF Analyst, says: “Expense ratio was cited as the most important factor when selecting an ETF, followed by issuer. In other words, when an adviser is looking for an ETF, it isn’t just the fee that matters, but also the brand name. Those two factors were reversed in last year’s survey, helping to explain why the Big Two continue to take in over half of net ETF flows year in and year out despite the proliferation of low-cost products from rival asset managers. Those two factors were much less important outside the US, explaining some of the challenges BlackRock and Vanguard have faced in capturing overseas markets.”

Cheap and liquid is powerful combination for ETFs

The vast majority of the Big Two’s most popular ETFs cost less than 8 bps. These ETFs, such as IVV, VOO, VTI and IEFA, are core building blocks in the portfolios of modern fiduciary advisers, who perceive them as providing value while limiting career risk. Brokers used to say they wouldn’t get fired for buying IBM shares and that sentiment has shifted toward BlackRock and Vanguard ETFs, BI says. It would be hard for a client to fault such purchases vs. buying expensive mutual funds or trying to trade stocks. These ETFs are also building up serious volume, making them cheap to trade, usually with bid-ask spreads of 1 bp. Low fees and low spreads in trusted brands will maintain wide moats around these funds for a long time.

Double the ETF assets of any other issuer

BlackRock and Vanguard have USD2.3 trillion and USD2 trillion in US ETF assets, respectively — about 60 per cent of the industry total. State Street is a distant third with USD1 trillion. BI writes: “We expect this gap to persist, albeit with Vanguard likely overtaking BlackRock at some point. In the past three years, the Big Two have captured about 62 per cent of the net inflows into ETFs, sustaining their market share. As the rest of the industry battles for the remaining 40 per cent or so of assets and flows, fees will matter. So will innovation in areas such as smart beta, thematics, active, leveraged and specialty, as well as ETFs that serve up specific outcomes using derivatives”.

Closing the asset gap with BlackRock

Though Vanguard dominates overall US fund assets with a 27 per cent market share, BlackRock leads in institutional business and offshore ETFs. Vanguard’s assets equal 84 per cent of BlackRock’s total, up from 50 per cent about 10 years ago. At that rate, Vanguard will pass BlackRock in five to six years — and perhaps earlier if the market stays down or flat, since Vanguard typically takes in more cash each year and has more bond exposure buffering equity-market depreciation. “Regardless of which one is bigger, we expect the pair to remain in a league of their own as long as investors continue to demand low-cost beta in ETF form from brand names”.

Struggling to snag share from S&P 500 ETFs

Another sign that the Big Two will be on top for a while is the lack of success of the generic S&P 500 ETFs from Goldman Sachs and JPMorgan, which haven’t taken much market share from older peers sponsored by Vanguard, BlackRock and State Street, BI writes. “The JPMorgan BetaBuilders US Equity ETF (BBUS) has USD1.1 billion, which normally would be considered a success, but it’s only about 0.1 per cent of the amount held by S&P 500 ETFs. That’s not much considering JPMorgan’s distribution power — especially among its own advisers — and an expense ratio of just 2 bps”.

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