Gavin Quill

ETFs: A Picture of Concentration - Market Share of Early Pioneers Declines as Product Offerings Expand

Pioneers in any market always maintain a high market share during the first stage of product establishment and proof of viability. Once that viability is proven, however, inevitably other players will follow and the early dominance of the pioneers from a market share perspective will rapidly erode.

Early adopters may continue to grow their business rapidly on an absolute basis, and they may even maintain a substantial lead over the newcomers. But market share levels nearly always decline during the second stage of product expansion, as the overall market for a product begins to extend past an initial threshold.

This is not a threat to the pioneers, but rather a validation of their early vision. It's also a healthy sign that additional profits are available in the market. As indicated in the table below, the big three exchange-traded fund (ETF) sponsors - State Street Global Advisors, Bank of New York, and Barclays Global
Investors - controlled 97.4% of worldwide assets as of April 1. This dominant position, however, has declined by 1.6% from 99.0% on January 1.

*excludes HOLDRS
Source: State Street Global Advisors, Bloomberg

In just the past six months, seven new sponsors have brought their first ETF products to market overseas. A large number of new entrants are expected both internationally and domestically over the next 12-18 months.

Three Players Dominate

Today, Barclays dominates the worldwide ETF landscape with 77 different products domiciled in the U.S., Canada, and the U.K. This represents more than two-thirds of all ETFs currently available. However, these funds (most in existence
for less than a year) average only $168 million in assets. Barclays total ETF assets of $12.9 billion represent only a 17.1% share of worldwide assets.

State Street Global is the market share leader in terms of assets. Its 22 funds (including one in Hong Kong and one in Canada) control $34.6 billion or 45.7% of all ETF assets. The flagship SPDR product with $26 billion is the largest single
ETF, representing 34% of global assets. Bank of New York ranks a close second in asset share with 34.6% derived from just two funds. Its Nasdaq-100 product (QQQ), currently at $22.6 billion for a 30% global share, has traded places in
recent months with the SPDR as the largest ETF.

Each of the big three sponsors are primarily focused on the US marketplace, where nearly three-quarters of all products are domiciled. However, this year has seen the rapid emergence of new players overseas. There are now eight
additional institutions offering 13 new products, both in established European markets and places as diverse as Israel and South Africa. Collectively, these eight firms control $2 billion or a 2.6% share. Six months ago, only two of these 13
products existed, amounting to just $354 million.

Crossing Borders

The American Stock Exchange (AMEX) is leading the way in establishing cross listings in both Asia and Europe so that U.S.-domiciled funds will eventually be traded around the clock on various bourses across the globe (beginning with Singapore this past month). Euronext, a joint venture of exchanges in Amsterdam, Brussels, and Paris, is offering two Merrill Lynch-advised products across Europe. And two of the big three advisors have already brought separate ETFs to market in a variety of other countries.

If we combine foreign domiciled products advised by both foreign and US companies, we find that there are now 31 non-U.S.-registered funds representing 27% of total ETFs worldwide. However, 20 of these are managed by Barclays,
State Street, or Merrill Lynch (excluding HOLDRs). The pioneering American firms are not just dominating on American soil.

Phase Two is Rapidly Approaching

ETFs are now domiciled in a total of 11 different countries or international exchanges (if we count Euronext as one), as indicated in the accompanying table.

Source: State Street Global Advisors, Bloomberg

Japan is now entering the ETF arena for the first time. Australia, India, and
Singapore are expected to follow soon. Over the next two years, we expect several new countries and new exchanges to begin offering their own ETFs. We are also looking for many new sponsors/advisors, and a blizzard of new products and cross-listings from the established participants.

In the United States, we also expect as many as a dozen new entrants to emerge over the next year or so. Vanguard, Nuveen, and ProFunds are already on record, and several more announcements may not be far behind. Look for several
of these new entrants to push the envelope with creative enhancements to the structures and features of the current crop of ETFs.

Domestically there may not be very much room for identical offerings that match the existing index-based lineup. But there remains a great deal of opportunity for new innovations and product extensions into fixed-income, leveraged, and enhanced ETFs, with eventually even an actively managed version.

This article originally appeared in the April 2001 edition of FRC Monitor, a publication by Financial Research Corporation, and is reprinted with permission.

Gavin Quill is Senior Vice President and Director of Research Studies at Financial Research Corporation. Gavin oversees the research and writing of comprehensive primary-source studies related to a wide variety of mutual fund industry topics.