The ETF industry grew at a record pace in 2012; Inflows topped $187 billion, beating the previous record of $176 billion in 2008. These funds are no longer the new kids on the block; they may actually own the block very soon. The landscape displayed several characteristics of a maturing industry; consolidation, margin compression, increasing number of service providers and the behemoth companies no longer fighting but joining as seen by’s announcement of entering the industry.
Darwinism was alive and well in the; there were 91 ETF closures. That’s well within the current trend range where we see anywhere from 4% to 8% of the listed ETFs closings annually. We also saw 165 new products coming to the market in 2012. The math means the ETF industry can continue to grow at a record pace and for the foreseeable future as only the quality products remain—a true survival of the fittest.
The price wars among the largest ETF providers garnered a lot of media attention but there is more to it than just a rush to be the least expensive. There has been a fundamental shift in marketing ETFs. The industry had been relying on branding as a major selling, but through the price adjustments and the changes in the underlying index providers, it’s clearly moving towards performance, price and ‘fund function’ as the real differentiators. In other words substance over style is now the prevailing strategy.
The industry does remain top heavy: 81 % of 2012 inflows went to the three largest ETF providers. Couple that with lower fees, and a barrier to entry is created for other potential providers that can be daunting. Free enterprise, of course, found a solution. We saw in 2012 the growth of third party platforms or white-label ETF groups. These groups provide investment managers with a one stop platform to launch an ETF or a series of ETFs. They consolidate the costs and time to market, which allow managers to launch a fund in less than 90 days. Northern Lights ETF Trust was the latest to announce, joining the likes of ALPs and Exchange Traded Concepts. There are currently at least 25 ETFs on the market that were launched off of a third party platform. The largest of these ETFs is the Alerian MLP ETF with $4.7Billion in AUM.
These platforms and the entrance of Fidelity and other large mutual fund complexes like T-Trowe Price, Eaton Vance and Legg Mason reflect a two-tier structure developing in the Industry. Those who choose to compete on a large scale with large distribution networks and those who have unique or alternative strategies that that want to launch them in the ETF wrapper for a defined investor base.
The size and scope of the industry has brought down the cost to launch an ETF and thus the breakeven point for an ETF has come down. This allows the smaller investment managers to launch their strategies and develop a profitable addition to their business; a trend that is expected to grow in 2013.
The ETF industry is evolving, maturing and fighting to become more democratic as the opportunities for all sizes of ETF providers are prevalent. The one constant in this changing landscape is that the investor is the real winner. Price wars, consolidation and the diversity of the new entrants means that investors are getting the best possible products at the best possible price from the ETF industry. If this trend continues there is no stopping the growth of ETFs and they can forget about owning the block, they will control the entire neighborhood.