Devise and conquer: how to enter the US ETF market

The US ETF market is expected to see significant growth in the coming years, but breaking into this lucrative market is proving to be a challenge, as Emma Cusworth reports

A crowd of foreign and domestic players are gathering at the doors of the SEC in the hope of cashing in on the continued growth of the world’s biggest ETF market. With the mainstream benchmarks already dominated by heavy-weight incumbents, new entrants will have to find increasingly innovative ways to establish a footprint.

The US ETF market has a long way to grow: BNY Mellon predicts that US ETF assets will double to $2trn by 2016. BlackRock believes this will be achieved by 2013. Either way, the potential in the world’s largest ETF market is massive and presents an enormous opportunity for new providers and products.

The fight for market share hinges on two critical factors: producing something that is truly additive and timely, and having enough distribution and marketing clout to gain sufficient brand recognition.

The degree of price competition in the broad benchmarks demonstrates the importance of this second point. Schwab’s ability to leverage its existing network and price its products aggressively was the lynchpin for its successful entry in 2009. It launched a suit of five ETFs tracking mainstream benchmarks. In order to compete with State Street, Vanguard and Barclays, Schwab offered commission-free trading to its already-established base of nearly eight million brokerage accounts.

Few companies could replicate Schwab’s success today. According to Ben Johnson, director of European ETF research at Morningstar: “It is difficult, if not impossible, to unseat the dominant providers in the main product areas as the first-mover advantage is so strong. New entrants are scraping for market share with finer, more exotic exposures and strategies. These will never be as successful as vanilla products, but are reflective of the seemingly inexhaustible creative ability of index and product providers to cover any white space in the market.”

The growing list of companies filing with the SEC for regulatory approval includes foreign players such as Natixis Asset Management, which filed in August to launch a minimum variance passive ETF and actively managed Latin American ETF. In doing so, Natixis has covered the two main routes for new entrants: smart beta and active ETFs.

 

Filling the blanks
Active ETFs are drawing particular attention and are expected to play a large role in driving future growth. Foreign and local ETF providers and mutual fund managers including iShares, Eaton Vance, AllianceBernstein, Dreyfus, State Street, JP Morgan and Russell Investments are all in the process of launching products in this area.

Active ETFs have already attracted over $3bn in assets with some funds proving extremely successful. Pimco has over $4.5bn in its Enhanced Short Maturity Strategy Fund (Mint) launched in November 2009. 

Mint’s popularity has forced others to respond. Federated Investors has filed to introduce a series of actively managed ETFs, including an Active Ultrashort Fixed Income ETF. Eaton Vance got regulatory approval for five active fixed income ETFs in March, which include an Enhanced Short Maturity ETF.