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What It Takes for ETF Providers to Make It on The Street


As the exchange traded fund universe expands, first mover advantage, low fees and branding have contributed to the success of various fund providers.

The ETF industry is dominated by a group of money managers that have enjoyed a first-mover advantage. BlackRock’s iShares holds 40% of ETP assets and offers almost 300 products, writes Credit Suisse analyst Victor Lin in a research note.

State Street Global Advisors is the second largest ETF provider. The manager launched the first ETF, SPDR S&P 500 (SPY) ; the first commodity ETF, SPDR Gold Shares (GLD) ; and the first sector ETFs.

PowerShares has also experienced a first mover advantage in other major categories. The fund sponsor was the first to launch commodity ETFs outside of precious metals and the first to come out with the highly popular low-volatility strategy.

While these companies have capitalized on the first mover advantage, this is not guaranteed.

“First movers risk that the market may not be ready for a particular type of product,” Lin said.

For instance, the first actively managed ETFs to hit the market in 2008 did not immediately usher in a new active ETF boom.

More recently, the so-called fee war has fueled growing interest for cheaper strategies. For example, Vanguard has become known for its low-cost fund products, and now the firm is the fastest growing ETP issuer.

Additionally, Charles Schwab has also offers rock-bottom fees on fund products and the brokerage also came out with its commission-free OneSource ETF program to attract greater interest in its ETF line.

Branding has also helped sponsors get a leg up on the competition.

“In addition to first mover advantage and cost appeal, ETP providershave also leveraged their brand and expertise (often in the mutual fund space) to develop successful ETF produc lines and serve as the basis for their distribution strategy,” Lin said.

For example, Van Eck has capitalized on its expertise in managing gold and other commodity investments, WisdomTree utilized fundamental weighting methodologies, ProShares used strategies from its alternative mutual funds and PIMCO pulled from its active fund strategies.

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

Max Chen contributed to this article.

Full disclosure: Tom Lydon’s clients own SPY and GLD.