For most of the history of ETFs, ETF firms were taking assets from competing industries (hedge funds, mutual funds, and futures). ETF firms weren’t really in competition with each other as there were relatively few ETF companies and overall assets of the ETF industry were relatively small compared to all investable assets. It was much better going after the larger pie of assets in (or flowing to) the mutual fund and hedge fund industries. The past year for the US ETF industry’s mergers and acquisition activity shows that is changing. Regardless of whether asset management firms acquired their way into the business, or launched their own product suite, the goal of M&A is different. The ETF industry has now grown to the point that ETF firms are no longer only competing against those other industries for assets. ETF firms are now competing against each other as well. The strategic question firms are asking themselves has changed from, “How do we enter ETFs?” to, “How do we grow our ETF business and/or protect what we have?” Some examples of this include:
In 2014 and 2015 there was a wave of ETF company acquisitions by large asset management firms. The reason was simple: if an asset management company was not in the ETF game, they realized they really needed to get in it. ETFs were not a fad that was going away. Asset management firms had two options: 1) build the ETF division of their firm from within, or 2) acquire an ETF company and its existing team and/or ETF products.IndexIQ was acquired by New York Life. Janus bought VelocityShares. Oppenheimer Funds bought RevenueShares (full disclosure: my former employers). Hartford Funds acquired Lattice Strategies. Columbia Threadneedle bought Emerging Global Advisors.
- Wisdomtree acquired ETFS’ European business and Junxure CRM (through FutureAdvisor) to diversify the asset classes represented by their products, expand globally, and increase their fintech capabilities.
- Invesco PowerShares acquired Guggenheim’s ETF business (both companies together are less fragile than separate as it reduces their overall AUM concentration).
- Franklin Templeton launched a suite of low-cost ETFs to use their distribution platform to enter the low-cost battle. (Not many assets thus far!)
- Mirae Investments acquired Global X.
- CICC acquired KraneShares, to establish a US presence.
- Van Eck acquired Think ETFs, a Dutch ETF issuer, to increase its global presence.
Who is Next Up on the ETF M&A Chopping Block?In this post, I’m looking at the ways we can classify ETF firms (in order to gain some insight on merger and acquisition activity) and what firms may be most likely to be involved in future M&A activity. This can give us insight into what stage of development the industry is at and where we are heading.
ETF Firm Qualitative and Quantitative CharacteristicsIn baseball, there are two schools of thought for evaluating players:
- The eye test
- The Moneyball approach
The “Oligarchy, but we all want to be Monarchy” Division
- BlackRock – $1.38 Trillion
- Vanguard – $870 Billion
- State Street – $609 Billion
- Invesco Powershares + Guggenheim – $177 Billion
- Charles Schwab – $107 Billion
The “Strong, Independent, We Don’t Need No Help” Division
- First Trust – $63 Billion
- WisdomTree – $44 Billion
- Van Eck – $36 Billion
- Pacer Financial – $2.1 Billion
- ARK – $1.5 Billion
The “Owned by a Bigger Firm” Division 5
- PIMCO – $16 Billion (Allianz)
- Global X – $10 Billion (Mirae Asset)
- IndexIQ – $4.2 Billion (New York Life)
- Oppenheimer Funds – $2.5 Billion (Mass Mutual)
The “Ice Cube” Division (For Old School Firms Reinventing For the New School)
- Northern Trust – $17 Billion
- Fidelity – $10 Billion
- Goldman Sachs – $7 Billion
- JPMorgan – $7 Billion
- The Principal Financial Group – $3 Billion
- Victory Capital Management – $2.6 Billion
- Franklin Templeton – $1.2 Billion
- John Hancock – $1.1 Billion
- Virtus – $1 Billion
The “Las Vegas” Division (for firms that are mainly built on leveraged products)
- Proshares – $30 Billion
- Direxion -$13 Billion
The Concentrated “I’m Not Fat, I’m Top Heavy” Division (for firms that have more than 50% of assets in one ETF) 6
- ALPS – $14 Billion (69% in AMLP)
- Deutsche Bank – $13 Billion (52% in DBEF)
- US Commodity Funds – $3.4 Billion (60% in USO)
- KraneShares – $2.1 Billion (78% in KWEB)
- Columbia – $1.2 Billion (68% in ECON)
- Virtus – $1 Billion (56% in AMZA) 7
The Mean Girls “You Can’t Sit With Us” ETNs Division (Because, you can’t sit with us, ETNs)
- UBS – $7 Billion
- Barclays Bank – $7 Billion
- Credit Suisse – $4 Billion
The Exemptive Relief Division (For firms who are mainly based on being a white label issuer)
- Exchange Traded Concepts -$5 Billion
- ETF Manager’s Group – $2.5 Billion
- AdvisorShares – $1.1 Billion
The “WisdomTree bought all our assets and now we don’t know what we are doing” Division
- ETF Securities (US) – $2.8 Billion (Under contract according to Eric Balchunas)
- The Concentrated “I’m Not Fat, I’m Top Heavy” Division: for firms that have more than 50% of assets in one ETF
- These names are interesting for two reasons. The first reason is it makes sense for them to look to merge with a similarly sized firm to reduce the concentration of their assets. Second, due to their concentrated assets, they can be a clean add-on to another asset manager looking to expand into whatever asset class/ETF type their assets are concentrated in. I give some more concrete examples below.
- The “Strong, Independent, We Don’t Need No Help” Division
- These independent firms are clean acquisitions and range in size from small to large asset managers, making them very interesting acquisition targets for all sorts of asset managers.
ETF Firms Quantitatively Measured: Measuring the Concentration of ETF Firms’ AssetsThe Herfindahl–Hirschman Index Score (HHI) is typically used to measure the concentration of firms across industries. It can be used by regulators to attempt to quantitatively measure if an industry is a monopoly, perfect competition, or something in between. Instead of measuring the concentration of firms within the ETF industry, I applied the measure to calculate the concentration of each firms’ assets. Each fund within a firm is measured as a stand-alone company. This can give us an idea of which firms are currently the most robust firms (low concentration of assets) to what ETF firms are the most fragile (high concentration of assets). From Wikipedia, here’s the formula (skip this part if you just want the summary): And here are the results for all ETF firms that manage $1 billion or more in AUM as of 3/01/2013, in order of most concentrated assets to least concentrated assets:
Combining the Qualitative and the Quantitative to Examine Potential Mergers and AcquisitionsLooking at the bottom of the list/most robust firms in the industry, we can see many of the industry’s largest firms are there: First Trust, iShares, Vanguard, and Schwab. None of them are reliant on a single fund or handful of funds for the majority of their AUM. This makes them more robust. All of these firms are in the top five of assets under management. There’s one major firm missing though: State Street. State Street comes in at number 13 overall making them one of the more fragile firms in the business. Their AUM has them as the third largest ETF issuer. But with approximately 43% of their AUM in one fund (SPY) they are more fragile than they initially appear. With iShares (IVV) and Vanguard (VOO) doing their best to whittle away at SPY’s dominance, it could be a good time for them to look around and put some of the cash flow from SPY to work. It’s not a dire situation, but State Street could use these HHI scores combined with the firms on the Independent and Concentrated divisions 8 above to see who could best help them reduce their fragility. For example, they could acquire USCF to increase their commodities exposure, and move them down the fragility list. Or they could take a look at Pacer, to add Pacer’s lineup of trend-following ETFs, to assist in lowering their HHI Score. PowerShares’ and Guggenheim’s merger provides an interesting real-world example. Prior to their merger, their standalone scores (shown above) have them at numbers 17 and 19. If we recalculate their HHI score and measure them as the combined company they are, their HHI score drops from 0.1892 and 0.1486 respectively to a .1226 combined. That moves the combined company down the list to a tie with Northern Trust at number 23, and now better positioned to withstand competitive threats. A flaw in using this model to evaluate the robustness and fragility of ETF firms is that it doesn’t give us insight as to how a firm became fragile or robust. It’s only a static/point in time measure. KraneShares is the number one “most fragile” firm according to this score, but they have a good problem. Their largest fund is growing very quickly and causing them to be very concentrated! Most asset managers would be glad to have that problem. Alternatively, WisdomTree, while robust based on our fragility score, would gladly go back to being more fragile if it meant they could regain all the assets they lost from their currency-hedged products — we asked Jeremy Schwartz, and he agreed!
ConclusionFor the first 25 years of the ETF industry, if you had ETFs you had an advantage over other asset managers. There was little competition amongst ETF firms. If you were selling investors ETFs you were mainly competing against mutual funds, hedge funds, or futures. With over 2,000 ETFs now listed in the U.S. that has changed. Simply offering a decent investment strategy in an ETF is no longer enough of a differentiator. Investors can now get transparent, tax-efficient, intraday liquid, low cost, pure beta exposure to almost any asset class or region in the world and are now are asking: What else can you do for me? Welcome to capitalism! ETF firms are looking around to figure out what else (or who else) they can offer to bring value to their clients and to better position themselves for the future. What combinations make sense to you?
- Not that either one of them was up for sale/able to be bought last year necessarily as they are both privately owned. ↩
- Those two companies are great examples of how there’s more than one way to build and grow a successful ETF business. Neither one of them are competing on low cost, and they both have very different distribution strategies: Meb Faber and his team at Cambria are more inbound focused by doing things such as blogging, podcasting, and writing books, while Pacer is more focused on the more traditional route of outbound distribution by seeking out investors in their funds through face to face meetings, cold calling and emailing, reaching into their Rolodexes, etc. But as evidenced by their 100%+ growth in the last year, both can work. ↩
- The NETFL did not have any players kneel during national anthems this year, but we did have players brought to their knees by VIX trades. ↩
- Source: http://www.etf.com/sections/etf-league-tables/etf-league-table-2018-04-27 ↩
- I know there’s a catchier title for this division ↩
- This data was calculated from 2/21/2018 data on ETF.com. It is possible it has moved since that date: http://www.etf.com/sections/etf-league-tables/etf-league-table-2018-02-21 ↩
- They are forced to play in two divisions, yes. ↩
- I’m picturing a meeting of State Street’s executives explaining to their board why the “I’m not fat, I’m top heavy” Division is who they need to target. Let’s make this happen State Street! ↩