With Putnam and John Hancock the latest names mentioned as working on new products, the ETF marketplace is on the cusp of its own Cambrian explosion. Yet, BlackRock's iShares is increasingly dominating the landscape.
BlackRock's iShares is once again growing its ETF market share. Indeed, iShares starts 2010 with a 50.1 percent share of the roughly $740 billion exchange-traded fund market according to data collected by Morningstar and published in Tuesday's WSJ Fund Track
. The paper notes that 2009 marked the first year that iShares gained market share since 2006, when its market share peaked at 59 percent. iShares share was 47.7 percent a year ago.
That Lee Kranefuss' team at iShares was able to turn around its two-year fall in market share despite the distractions created by the BlackRock buyout and even with the entrance of major fund firms such as Pimco and Charles Schwab during the year raises critical questions for firms seeking to enter the ETF market.
With winners and losers in indexing typically decided by the intertwined and AUM dependent tracking error and cost, iShares has a decided advantage over WisdomTree, ProShares, Rydex, Invesco's PowerShares and others that rely on indexing tweaks rather than scale to differentiate their funds.
Yet, iShares is also building its share against indexing behemoths State Street and Vanguard. Both of those firms have scale to rival that of iShares and but are failing to make inroads into iShares' business.
iShares advantage over its larger rivals appears to be the liquidity of the market for its funds. More thinly created ETFs have higher spreads, meaning that a larger fund with a similar index will boast superior performance over time. In the minds of shareholders at least, iShares seems to have hit that sweet spot.
Liquidity, that second benefit of scale, could be a factor shaping the landscape as a number of active managers seek to follow in the footsteps of Bear Stearns and Pimco in launching active ETFs as their first foray into the space.
While T. Rowe Price and Goldman Sachs have already started the formal process with the SEC of creating ETFs, as many as two dozen other fund firms are mulling over whether to start down that path, reports InvestmentNews
Putnam and John Hancock are both fund firms now working through the list of pros and cons arising from adding ETFs to their product line ups.
Putnam CEO Robert Reynolds told the trade publication that “As actively managed ETFs become a reality, we want to be part of it." Yet, he cautioned that Putnam's people need to "do careful analysis of what the advantages and disadvantages are of ETFs."
Meanwhile, the publication cites an unidentified source at Hancock as telling it that Hancock will file paperwork for an active ETF mirroring its lifestyle funds with the SEC in the coming weeks.
Hancock CEO Keith Hartstein reportedly confirmed that the fund firm has looked into launching actively managed ETFs. Yet his on-the-record quote does not reveal an overwhelming confidence in the new fund form.
"There is nothing that leads me to believe that actively managed ETFs are going to be successful,” InvestmentNews quotes Hartstein as saying. He also pointed out that active ETFs have yet to make a claim on much in the way of assets.
Sean Hanna, Editor in Chief
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