There’s a new trend in investing, and it’s changing the game for a number of Wall Street institutions.
That trend, according to a note from Barclays’ Kenneth Hill, is the growing popularity of exchange-traded funds — “passive products” that track indices and offer low-cost exposure to a particular market of asset class.
According to the note, ETFs are having a big impact on asset managers, eBrokers, and exchanges alike.
For asset managers, like BlackRock, Charles Schwab, and Invesco, ETFs are a bit of a mixed bag.
These funds have exploded in popularity, with ETF assets under management standing at almost $US2 trillion at the end of 2014. The growth in assets is now beginning to slow, however, especially in the equity space.
Increased competition has also led to fee pressure, which in turn has put pressure on revenues for the fund managers who run the funds.
Here is a chart highlighting the slowing growth rates:
Here’s the impact on fees:
As a result, the Hill argues that there will be a divergence in the performance of fund managers.
“We expect higher growth and less pressure on fees for the more targeted, niche, non-vanilla ETFs vs. standard broad-market ETFs. Still, we do not see growth as automatic even for these types of ETFs,” Hill said.
“For example, [Blackrock] has seen significantly stronger flow trends compared to [Invesco] in its more targeted and smart-beta ETFs. Looking forward, we expect ETFs to continue to grow at a much faster pace than mutual funds, but believe investors might need to reset expectations as growth slows over time and fee pressure continues.”
eBrokers like TD Ameritrade, E-Trade, and Charles Schwab are “underappreciated beneficiaries” of the trend toward ETFs, according to the note.
“Specifically, we see the group as benefiting from long-term favourable distribution trends, an increasing level of trading activity, and solid levels of growth following the launch of their own product set.”
That’s because online brokers are able to earn revenues from trading fees as well as the distribution of the products, according to the note.
Schwab has also developed its own ETF products as well as distributing third-party funds.
The note said: “The company has turned in very strong levels of growth this year, posting the second highest growth rate in the top ten ETF providers, with $US11bn of inflows through October, or 47% annualized organic AUM growth.”
Exchanges have mainly been affected because of the shift in trading activity as ETF volume grows. ETF-listed trading volumes have grown at a “very good clip”, according to the report, and are now driving total trading activity.
The note said: “We anticipate that given the higher levels of trading that ETFs make up, and the strong tailwinds for the product, we should see overall cash equity trading growth be well supported moving forward.
“This year alone, we note that YTD activity for cash equities is showing some of the best y/y growth (up 8% y/y) for all the products and asset classes we track, and that Tape B volume (a good proxy for ETP/ETF volume) is up 26%, driving the broader growth of cash equities.”
There is also a growing battle for ETF listings and market share between the exchanges, Hill notes — especially more recently as the BATS exchange has entered the fray.
Business Insider reported last month that BATS was winning new listings.
Bryan Harkins, head of US markets at BATS, told Business Insider at the time: “
We want to be number one in ETF listings in a few years’ time.”
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