Just How Concentrated is the ETF Industry?
The first exchange-traded fund was launched in 1993. Since then, this investment vehicle has exploded in popularity. ETFs have become synonymous with low-fee, passive investing.
This has also created unwanted outcomes. Today, market share within the passive investment industry is dominated by a handful of corporate giants. Two of these ETF behemoths have cracked the $1 trillion mark in assets under management.
Having an understanding of the businesses behind the ETF industry is important for passive investors. In this article, we will provide an introduction to the major players in the ETF industry and discuss the specific strategies and tactics that each player is known for implementing. `
You know that any consumer technology device starting with ‘i’ - like the iPhone or iPad - is an Apple product. In investing, ETFs starting with ‘i’ belong to the iShares fund vintage, owned by BlackRock. BlackRock is the world’s largest ETF company. It currently has $1.554 trillion in ETF assets under management.
BlackRock was founded in 1988, and over the past three decades has grown from eight people working in a start-up to a global giant. It began selling Aladdin, its proprietary technology platform, in 1999. That was also the year of the company’s initial public offering.
In 2006, the company bought Merrill Lynch Investment Management, broadening its presence on the world investment stage. When it acquired Barclay’s Global Investors three years later, it became the largest asset manager in the world.
In 2000, BlackRock launched its iShares Core ETFs, offering a diverse choice of equities and bonds. Its largest, iShares Core S&P 500 ETF, has $203 billion in assets under management. It focuses on U.S. and North American companies in the S&P 500, including both value and growth stocks so that investors may receive yields and capital gains.
Overall, BlackRock manages an impressive 358 ETFs in the U.S. market, with asset classes in equities, fixed income, asset allocation, and commodities. Worldwide, the number of available BlackRock ETFs exceeds 800. Environmental, social and governance (ESG) practices are an integral part of the company’s investment processes.
2. The Vanguard Group
With $1.008 trillion in ETF assets under management, this venerable issuer comes in second to only to relative newcomer BlackRock. Virtually synonymous with mutual funds, Vanguard was founded in 1975 by the soon-to-be-legendary John C. Bogle. Bogle passed away in 2019, but pioneered the then-novel idea that mutual fund companies should have a client-owned structure. Warren Buffett once said that “Jack did more for American investors as a whole than any individual I’ve known’.”
Just as Vanguard offers a mutual fund for nearly any type of asset class or risk level, the same now holds true for its ETF selection. Currently, 74 ETFs are listed on Vanguard’s roster. Along with its standard bond, small cap, mid-cap, large cap, growth, value and international stock ETFs, Vanguard provides a variety of sector and specialty ETF offerings. These include:
- Consumer Staples
- Information Technology
- Real Estate
3. State Street Corp.
In 1993, State Street Corp.’s S&P 500 SPDR became the very first ETF. As an individual ETF, it remains the largest, with $312 billion in assets under management. State Street Corp. itself now boasts $640 billion in assets under management overall, and approximately 140 ETFs.
State Street Corp. started State Street Global Advisors, Inc., in 1978 to provide institutional management services, and shortly thereafter created U.S. and international index funds. Fifteen years later, partnering with the American Stock Exchange, the ETF industry was born, with State Street launching the first fund. Fast forward five years, and the company proves responsible for another first, the initial sector-specific ETFs.
In 2004, State Street launched the first ETF backed with gold. Other pioneering efforts include the first actively managed senior loan in 2014, in partnership with the Blackstone GSO, and in 2016, the launching of its first proprietary ETF, the Gender Diversity Index. That now famous statute of Fearless Girl on Wall Street was placed there courtesy of State Street Corp.
Atlanta-based Invesco has $203 billion in assets under management. Its myriad ETF offerings include one of the industry’s largest, the Invesco QQQ ETF, whichunlike many other ETFS tracks the technology-heavy NASDAQ 100. It is also the second most traded ETF in the U.S., based on average daily volume traded. Invesco QQQ ETF has $90 billion in assets under management.
Invesco’s history dates back to 1935, when it was incorporated in the United Kingdom as H. Lotery & Co., Ltd. Invesco per se was launched in the U.S. in 1978. In 1990, the company acquired PRIMCO capital management, a fixed-income manager.
In 2006, Invesco expanded its business into ETFs with the acquisition of PowerShares Capital Management. After buying Morgan Stanley’s Van Kampen Investments and its other retail management businesses in 2010, Invesco agreed in 2017 to acquire Guggenheim Investment’s ETF portfolio. These acquisitions give Invesco a total of 261 ETFs trading in the U.S., in asset classes ranging from alternatives, asset allocation, commodities, currency, equity, and fixed income.
5. Charles Schwab Corp.
Although Charles Schwab Corp. only entered the ETF market in 2009, it now has $142 billion in ETF assets under management, making it the fifth-largest of such issuers. The company doesn’t have the sheer number of ETFs offered by competitors, at just 25, but the ones it does offer possess an enviable track record. Schwab also upped the ante by initiating commission-free ETF trading, and its expense ratios are among the lowest in the business.
Schwab ETFs include domestic and international equity and fixed income, along with its Fundamental Index ETFs. The latter are weighted on other factors than market cap, including:
- Book Value
- Cash Flow
Fundamental Index ETFs hold the same stock as conventional index ETFs, but give them different rankings based on the underlying fundamentals. Unlike Quant Strategy ETFs, which they resemble, Fundamental Index ETFs hold a large number of stocks, and are transparent about the technical factors going into their determination.
Now in his 80s, founder Charles Schwab retired in 2008 but remains his company’s largest shareholder. He started his brokerage business in San Francisco in 1971, becoming a leader in the discount brokerage business. It is now the largest independent brokerage in the industry. Schwab began appearing in his firm’s TV commercials early on, personalizing his company and attracting newcomers to investing.
The concentration of market share among ETF issuers is at an all-time high. The industry’s small players that were not discussed in this article have virtually no ability to compete with the entrenched incumbents. With that said, a vicious fee war continues to play out, which is inarguably a positive for self-directed investors around the world.
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