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Richer Get Richer in ETFs — Harder for New Entrants?


The exchange traded fund universe is quickly expanding and maturing, but the growth has largely benefited larger companies and could leave new, smaller players on shakier ground, according to Citigroup.

Citigroup (NYSE: C) analyst William Katz says the new alliance between BlackRock and Fidelity Investments “reinforces the notion barriers to entry are rising – not falling,” reports Brendan Conway for Barron’s. [Tom Lydon Discusses the Fidelity-BlackRock ETF Deal]

“The fact that Fidelity is partnering with BLK as opposed to building ETF manufacturing is a recognition that it is difficult for new players to enter the industry,” Katz said in a research note. [Fidelity, iShares Expand ETF Partnership: What Does it Mean?]

Katz points to three dominant aspects in the ETF industry: almost 70% of global ETP in assets under management fall under the three largest providers, scale and profitability go hand-in-hand, and distribution is a major factor, especially in reaching market and geographic segments.

Moreover, Katz outlines three key points that are raising the barriers to entry: “first mover” advantage where the first ones on the scene garnered greater assets, slow regulatory process, which favors established firms with exemptive relief, and rising strategic costs.

Nevertheless, the analyst leaves some room for smaller players with novel ideas.

“Management sees room for other niche players to come in with an interesting value propositions to capture share as the overall market for ETFs builds,” Katz said in the article.

“The move also reinforces the scarcity value for existing platforms with differentiated product sets and strong(er) organic growth prospects,” Katz added, Joe Morris reports for Ignites.. “As such, we continue to believe WETF’s [WisdomTree’s] model efficacy and scarcity value are rising, and could ultimately drive a change-of-control premium.”

For more information on the ETF industry, visit our current affairs category.

Max Chen contributed to this article.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.