It’s been a busy year in the game of ETF landgrab. And a colorful one, too. From exciting M&A deals to some splashy building-from-scratch newcomers, we are seeing a little bit of everything as asset managers look to build scale and capture the impressive growth momentum of the ETF market.
Key Takeaways:
- Recent big M&A deals from firms like T.Rowe Price and Goldman Sachs show acquisitions are a popular path to ETF business growth and scale.
- Paths to growth vary. While some firms buy established assets, others are blitz-scaling internally, such as newcomer Corgi Invest.
- As competition intensifies for shelf space, the market share of the top three ETF issuers has dropped from over 90% to roughly 70%.
The Latest M&A Deals Point To Market Reality
Asset creation this year is (again) breaking records. Product proliferation is, too. And the number of market participants? Well, that’s off the charts.
Consider that back in 2010, there were 39 ETF issuers competing for shelf space and investor attention in the U.S. market. Today, we have about 350 issuers, and if we look at the industry from an ETF brands perspective — some issuers support multiple brands — we are looking at more than 500 unique ETF brands.
Competition for shelf space and investor assets is stiff, and stiffening.
It’s not surprising, then, to see mergers and acquisitions be a big trend this year. T.Rowe Price’s decision to acquire F/m Investments soon after Goldman Sachs’ move to buy NEOS Investments and Innovator ETFs has M&A making headlines as a popular path to scale.
To be fair, my friend Nate Geraci saw this coming. Back in January, Geraci, who’s president of NovaDius Wealth Management and host of the weekly ETF Prime podcast, called for an “uptick” in ETF issuer M&A activity as his No. 1 prediction for the year.
“With competition as fierce as ever, the path of least resistance to compete in the ETF Terrordome is crystal clear in my opinion: acquire, rather than build,” he said.
These acquisitions bring in-house emerging — and successful — ETF lineups and ETF teams that complement the acquirer’s existing ETF efforts. It’s scale by addition rather than by original creation. It makes a lot of sense.
Macro Conditions May Favor Niche Solution Providers
In the case of these recent deals, the expertise of the acquired firms — namely, defined outcome, derivative income, and fixed income — could say something about the role current macro conditions may be playing in this popular choice as a path to scale.
It comes down to market opportunity.
In a higher-for-longer rate environment, where cash yields are competing with stocks, demand for options income, downside protection, and targeted fixed-income strategies has been massive.
Fixed income, alone, as an asset class, has gathered twice its asset footprint in new investor dollars this year. Options-based ETFs have been prolific asset gatherers too, especially among those seeking alternative income and capital protection.
Rather than taking years to build complex options desks and quantitative bond teams from scratch, some powerhouse asset managers are choosing to deploy capital to acquire fast-growing, high-margin ETF issuers instead.
Smaller, newer issuers swimming in some of these high-expertise niche segments are well positioned to benefit from this trend.
The Road (to Success) Less Traveled These Days
That said, M&A isn’t a new path to scale. We’ve been marveling at the ETF issuer deals for a long time.
Go back to the early ETF days when BlackRock was making its foundational purchase of Barclays Global Investors (iShares) and Invesco was taking in Guggenheim’s ETF business, and you get a sense of just how much M&A is intertwined in the fabric of today’s ETF market.
But there is “no single blueprint” for building an ETF business, to borrow the words of my friend Nicholas Phillips.
Nick, who is president of ETF Capital Markets Advisors, wrote a great commentary this week pointing to the different paths to ETF success and scale — building internally being one of them.
“There is no single path to building an ETF business,” he said. “Some firms build gradually, some find a home-run product, others use fractional expertise as they grow, and firms with sufficient resources can acquire established businesses and buy scale. Still others are experimenting with entirely different models.”
Perhaps one of the most fun-to-watch firms this year choosing to do exactly that is Corgi Invest.
We saw the single-largest new ETF rollout in history when Corgi launched 34 actively managed funds on the Cboe exchange this past May. Since then, the newcomer, hailing from its San Francisco-based parent company Corgi Insurance, has continued to flood the market with a footprint that’s already approaching 200 ETFs, $800-million-plus in assets, and hundreds more funds in the pipeline.
This splashy entrance and overall effort is centered on the firm’s commitment to build it all internally, from scratch, and quickly, too. Look no further than the number of job postings — and recent hires — at Corgi to get the picture: this firm means business about building its ETF business.
Bloomberg’s Senior ETF Analyst Eric Balchunas recently shared an illustration of what Corgi’s move into ETFs may look like for perspective relative to the largest ETF issuers in the market. This chart (below) says it all. Corgi is looking to challenge BlackRock on its number of ETFs in one year — something that took BlackRock 20 years to do.
Launch and Scale Different Things, Both Part of Growth Story
As we know, launching ETFs isn’t the same thing as having a successful ETF business.
Scale is key, and most of the time, it doesn’t come easy. About 40% of the ETFs in the market today have less than $100 million in assets. Many are barely past seed levels.
The industry is growing quickly, but the dispersion in that growth is huge. Whether opting for the faster-to-scale M&A path or choosing the potentially slower-burn of an internal buildout, building an ETF platform in today’s crowded market is challenging.
Either way, as the ETF market continues to expand at unprecedented pace, we will continue to see new movers and shakers challenge their placement on the ETF league table. Scale is everyone’s game.
Not too long ago, the top three issuers — BlackRock, State Street Investment Management, and Vanguard — commanded over 90% of all U.S.-listed ETF assets. Today, their combined share sits at 71%. They are growing, too, but so are many others. It’s been fun to watch.
Competition comes for everyone.
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