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Is the global ETF industry getting smaller?


The perception of investors may be that there are more and more ETF products coming onto the market, catering to every trading whim. But evidence is emerging that the actual number of ETFs listed on global exchanges – not the total assets under management – is getting smaller.

Competition within the ETF market is incredibly stiff: there are over 1000 ETFs globally with less than $50 million in assets under management. That is unsustainable. It raises the question of how many of these funds are going to be able to survive in an increasingly competitive market where there is more focus on how low fees can go.

If this is starting to remind you of a limbo dancing competition, then you would be right.

Since 2017 the numbers of ETFs closing down has increased, from 135 in 2017 to 155 in 2018, according to data from Morningstar.

“Fees and margins have compressed across the ETF industry so much that increasingly they enable only the largest scale players to be profitable,” comments Michael Andrews, head of investment products research at SS&C, a fund administrator.

For example, Vanguard announced on 26 February that it would be cutting fees on 10 ETFs that invest in international equities and fixed income instruments. Major distributors of ETFs, like Charles Schwab and Fidelity, are increasing the number of ETFs that are offered on a commission free basis. For active investors in funds, this is making ETFs even more attractive.

For both investors and fund managers there is a new approach to ETFs on the march, called direct indexing. This is still only at its nascent stage. This is where a stock broker or financial adviser buys the shares in an index directly, rather than going to the ETF market. Surely this is more expensive? Apparently not, once you take into consideration some of the tax planning advantages involved.

Direct indexing has been facilitated by advances in technology and low transaction costs. Such solutions are already being provided to advisers in the US, and it is only a matter of time before investment advisers in Europe are providing similar services to their clients.

“We have moved into an era in which the consumer wants customisation and technology,” says SS&C’s Andrews. “It is becoming exponentially easier to provide personalised portfolios to high net worth investors and households in ways that would have been much more difficult and expensive only a few years ago.”

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This article does not constitute investment advice. Make sure you do your own research or consult a professional advisor.

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