As a new crop of money managers and investment banks enters the hot market of exchange-traded funds, the challenge has already proven too much for some in a sector where scale is key.
Already, a few carcasses have been left along the way as firms such as Northern Trust Corp., AXA Investment Managers and London & Capital PLC withdrew in the past year after unsuccessful attempts to kick-start ETF businesses.
Still, ETFs are luring heavyweight managers including Pacific Investment Management Co. LLC, T. Rowe Price Group Inc., Goldman Sachs Asset Management and Russell Investments.
“There's no doubt growing an ETF business right now is very challenging,” said Ted Hood, CEO of Source, which launched last summer in Europe to offer ETFs to a largely institutional market. “It's not an immature market, and there are well-established incumbent firms that are good at what they've done to date.”
“So the way we've approached (the market) is with the aim to grow the size of the market, so that we can participate in that growth,” said Mr. Hood, whose firm is owned by Bank of America Corp., Goldman Sachs Group Inc., Morgan Stanley, JPMorgan Chase & Co. and Nomura Holdings Inc. Source had $3.6 billion in ETF assets under management as of Jan. 31.
Global ETF assets surpassed the $1 trillion mark at the end of last year, up a whopping 45.7% from a year earlier, according to an annual ETF industry review published earlier this month by BlackRock Inc.'s ETF research and implementation strategy team in London.
In 2010, ETF assets are predicted to increase by 20% to 30%, according to the report.
The trend is driven by stronger investor demand for “easy, transparent and inexpensive” exposure to beta, said Adrian Valenzuela, London-based managing director and co-head of equities distribution at JPMorgan for Europe, the Middle East and Africa.
Firms that have jumped on the ETF bandwagon or plan to do so include:
• PIMCO, Newport Beach, Calif., gained about $418 million in asset inflows as of Dec. 31 within months of launching a series of fixed-income ETFs, including actively managed strategies, in the U.S.
• Jefferies Asset Management LLC, a division of Jefferies & Co. Inc., New York, introduced several ETFs that invest in commodities-related companies. The firm has about $100 million in ETF assets under management.
• T. Rowe Price in 2009 filed with the Securities and Exchange Commission to offer active fixed-income and equity ETFs in the U.S. The application is still pending.
• Goldman Sachs and its asset management subsidiary, GSAM, also have applied to the SEC to manage equity, fixed income and blended ETFs in the U.S. That application also is still pending.
• London hedge fund manager Marshall Wace LLP is introducing an ETF that physically tracks an index based on the firm's market-neutral investment strategy.
• Russell, Tacoma, Wash., hired away two top iShares executives — James Polisson and Andrew Arenberg — in January as managing directors to launch an ETF business. Russell spokesman Steve Claiborne declined to provide details, but hinted the firm will pursue active ETFs.
• ETF Securities Ltd., London, in November launched ETF Exchange, a global platform backed by a consortium of banks that includes Bank of America, Citigroup Inc., Rabobank International and Barclays Capital. Barclays Capital is a subsidiary of Barclays PLC, which only last year divested its ETF division iShares as part of the sale of Barclays Global Investors to New York-based BlackRock. Separately, ETF Securities also launched in the U.S. in July, and has gathered more than $1 billion in assets nationwide.
Charles Schwab Corp. and John Hancock Funds LLC are among firms in wealth management that are taking the plunge into ETFs.