Building product scale is crucial in a low-margin business such as exchange-traded funds*, and is something few asset managers have managed to do, particularly in Asia. As a result, ETF issuers – the larger ones at least – say industry consolidation is inevitable.
After all, there are 67 ETF providers in Asia-Pacific ex-Japan alone, managing $61.2 billion in assets, with the top five managing 53% of the total as at June 30, according to BlackRock data. The concentration is even greater globally, with the top three sharing 69.4% of the assets worldwide.
There will, in due course, be a “shake-out” of the smaller players that fail to achieve sufficient scale, says Frank Henze, Asia-Pacific head of ETFs at State Street Global Advisors, the second biggest player globally and the leader in Asia by AUM.
Nick Good, Asia-Pacific head of BlackRock's iShares, the world's biggest ETF issuer, makes a similar point. “In recent times, there has been a rush to issue new product in Asia, but providers must have scale and resources to last the course,” he says. “We expect a period of consolidation where some of these players exit or consolidate.”
Some firms that considered getting into the business have apparently accepted that this is the case. There are firms that decided not to launch ETFs, at least partly because they felt that only the top handful of providers could build and retain a profitable business. Indeed, one large company chose not to enter the industry because it felt it would be unable to challenge the leading issuers in terms of AUM.
Moreover, one asset management CEO with plans to launch ETFs has expressed to AsianInvestor concerns about his firm's ability to compete with the likes of iShares in terms of branding and marketing.
“In the US at least, it seems the successful ETF providers launch many products, with two or three huge sellers, while the rest attract relatively little assets, but are needed for the time when they become flavour of the month,” remarks Robert Horrocks, chief investment officer at Matthews Asia, a US-based but Asia-focused active fund manager.
That said, many of the smaller issuers say they don't expect to challenge the biggest providers in terms of volume, but want to offer products to fill certain niches.
The lack of mutual recognition across different markets in the region means a new approval is required for each and every launch in a new country, which takes time and cost, says Marco Montanari, Asia-Pacific head of db X-trackers, Deutsche Bank's ETF arm.
However, a passporting scheme looks to be a few years away yet.
*For a detailed look at the market, see AsianInvestor's special report on ETFs and indices, due for publication in early September.