Worldwide ETF assets keep increasing, but at slower rate

Worldwide assets managed in ETFs by managers in Pensions & Investments annual survey rose 9.2% in 2011, to $1.278 trillion, far off the pace of the 36% growth in 2010.

Of that total, more than 95% is in sponsored, or proprietary, exchange-traded funds. (P&I did not ask for a breakout between assets in sponsored ETFs vs. non-proprietary ones for the year-earlier survey, but estimates those assets alone rose 9.5%, to $1.218 trillion.).

While overall asset growth slowed in 2011, exchange-traded funds still had slightly positive net inflows in the year, said Deborah Fuhr, a principal in the London-based ETF consulting firm ETFGI LLP. She said that is in contrast to mutual funds, which had net outflows in 2011.

Ms. Fuhr said the positive flows during a shaky economy is a positive sign for the long-term future of the ETF marketplace.

For this special report, P&I looked at the worldwide assets of firms in its universe of managers of U.S. institutional tax-exempt assets. The total ETF market worldwide amounts to $1.351 trillion, according to BlackRock Inc. data. ETF assets in P&I's universe make up 95% of that total.

New exchange-traded funds seemed to be introduced each day in 2011, with more money managers getting into the business. There were 3,019 ETFs at the end of 2011, up 22% from a year earlier, according to an ETFGI report.

But three firms continued to dominate the ETF business, BlackRock's iShares division had 39% of the global marketshare, State Street Global Advisors followed with 17.68% and Vanguard Group Inc. had 12.1%, according to data from ETFGI as of April 30.

Indeed, those three firms were at the top of P&I's ranking of managers of sponsored ETFs. BlackRock reported $593.36 billion; SSgA, $271.24 billion; and Vanguard, $170.86 billion at year-end 2011.

A key trend in 2011 for the ETF business echoed a broader move among investors generally: flows into fixed income and out of equities. Fixed-income ETF flows in the U.S. market alone were up 39% in 2011 to $179.9 billion, according to data supplied by SSgA.

“On a relative basis, fixed-income ETFs industrywide have been the fastest-growing ETF segment over the last few years,” said Kevin Quigg, global head of ETF strategy and consulting at SSgA in New York.

Mr. Quigg said the volatility of the equity markets has helped spur investor interest in fixed-income ETFs.

Equity-based ETFs still make up the lion's share of the marketplace, 67%, according to Ms. Fuhr. Fixed-income offerings comprise 16%, and commodity-based ETFs, the next largest group, 12%.

Another trend — one that has continued into 2012 — is increased price competition. In fact, there's been a bit of a price war between two of the market leaders.

In December, Vanguard cut expense ratios on its family of sector ETFs, with most falling below those of SSgA's comparable exchange-traded funds.

SSgA countered in January, dropping it prices on sector ETFs below Vanguard's. In April, Vanguard dropped prices on 13 additional funds.

According to a May report by Moody's Investors Service Inc., BlackRock also is moving to protect its market-leading position, lowering the expense ratio on the popular iShares MSCI Emerging Markets Index Fund to 0.67% from 0.69% in January after being surpassed in both assets and average daily liquidity by Vanguard's lower-cost (0.22% expense ratio) MSCI Emerging Markets ETF.

The Moody's report said that through the first four months of 2012, approximately 90 ETFs have lowered expense ratios compared with 95 for all of 2011.

“In a market filled with "me-too' products, price has become an increasingly important differentiator, “the report said. “Based on the large number of price adjustments in 2012, the large U.S. ETF sponsors appear committed to price completion as a strategy for winning greater market share.”

Joel Dickson, an ETF analyst for Vanguard's investment strategy group in Valley Forge, Pa., said the company does not take into account prices charged by competitors in calculating its fees. He said as the ETFs gain more assets, the company is able to achieve cost efficiencies and passes those along to consumers.

Christine Hudacko, a spokeswoman for BlackRock in San Francisco, said the Moody's report was inaccurate in attributing the fee cut to competition. She said the expense ratio for the MSCI Emerging Markets Index Fund and other iShares MSCI ETFs are automatically lowered by one to three basis points when certain asset levels are reached. “This is part of normal course of business,” she said. “It was not a special decision.”

SSgA's Mr. Quigg said price competition is part of the equation, but efficiencies of scale as ETF assets increase also are factors in reducing fees.

The year 2011 also saw trends within trends. For example, within the increased flows to fixed-income ETFs, there were increased flows into high-yield ETF offerings.

“There is increasing demand from both retail and institutional investors for a high-yield ETF that they can come in and out of in a highly volatile environment,” said Daniel Gamba, New York-based head of Americas iShares institutional business at BlackRock.

iShares' biggest fund in that category, the $14 billion iShares High Yield ETF, had net inflows of $3.5 billion in 2011, Mr. Gamba said, compared with $2.6 billion in 2010. The fund has taken off at a faster pace in 2012: BlackRock statistics show that as of June, 5, it had another $3.8 billion in net inflows.

Mr. Gamba said one of the attractions ETFs hold for investors in general is transparency; investors can see the holdings daily, something not possible in a mutual fund.

“People want to know how much Spanish exposure they have in their portfolio,” Mr. Gamba said.

Benjamin Fulton, managing director, head of global ETF business at Invesco PowerShares Capital Management LLC, Wheaton, Ill., the fourth-largest ETF provider in P&I's survey, said while his firm's ETFs saw strong outflows from risk-on equity ETFs in 2011, it experienced strong inflows into fixed-income, particularly high-yield, emerging markets and sovereign debt funds.

For example, the $1.72 billion PowerShares Emerging Markets Sovereign Debt Portfolio had 2011 inflows of $490 million, Mr. Fulton said. Through June 4 of this year, the fund had garnered another $317 million in assets, he said.

Mr. Fulton said he believes ETFs will have strong overall inflows again when the market recovers.

“At times when markets come out of chaos and confusion, ETF flows tend to do well, investors want transparency, they want the liquidity that ETFs can provide,” Mr. Fulton said. n