) $13.5 billion acquisition of Barclays Global Investors in
December 2009 brought with it the world's leading Exchange Traded
) franchise in iShares. Vanguard Group has plans of selling ETFs in
Europe from this year, which poses a threat to BlackRock's market
share of this popular product. These two compete with other large
investment management firms like State Street (
) and Fidelity. Here we explore why Vanguard could take ETFs fund
flows away from BlackRock.
ETFs at a Glance
ETFs offer investors quick and cost-efficient diversification.
BlackRock structures these products meeting different criteria in
terms of exposure to selective sectors, investment horizons and tax
benefits, which are then traded on the stock exchanges like common
stocks. The fact that these products trade on the stock exchanges
offers liquidity and transparency. Most importantly, ETFs enable
the investor to diversify investments across a wide underlying
asset base at costs significantly lower than those charged at
mutual funds. BlackRock's iShares is the leading ETF provider in
Why is the European ETF Market Crucial?
Promising Growth Prospects
: US ETFs hold just over $1 trillion in assets compared to $332
billion in European ETFs. In fact, passive (indexed) investing in
general in the European asset management market has a lower
penetration than across the Atlantic in the U.S. With the average
expense ratio on actively managed mutual funds in Europe at 1.52%
and on index funds at 0.77% while Europe-based ETFs cost around
0.45%, we expect European ETFs to benefit from inflows. Though
Europe is a nascent market with respect to ETFs, we expect it to
grow at around 30% year-on-year in the near future, which makes
it a promising market for ETF players.
Favorable Regulatory Reforms
: With the UK imposing a ban on independent financial advisors
taking commissions from fund companies, thereby removing a
marketing advantage enjoyed by mutual funds until now, this adds
another reason why ETFs sales should grow.
How does Vanguard have an edge over BlackRock in European
Vanguard's competitive fee
: Vanguard ETFs fees are among the lowest in the US. The average
expense ratio for Vanguard is less than half the average for
BlackRock's iShares.Given that low costs are one of the key
attractions to ETFs, we expect lower costs from Vanguard ETFs to
draw some of these funds away from BlackRock. Vanguard was the
top-seller in the 12-months period ending in February, with
nearly $41 billion in net inflows while State Street came in a
close second with $39 billion. BlackRock lagged behind with
around $32.5 billion of net inflows.
Fragmented European ETF market
: BlackRock might dominate with close to a third of the ETF
market in Europe with $108 billion in assets under management,
but unlike the U.S. where the top three players make up almost
82% of the total market, Europe is much more fragmented.
BlackRock doesn't carry as much weight in Europe as it does in
U.S. and hence is more vulnerable to new competition.
How Sensitive is BlackRock's Stock to ETFs?
We currently estimate BlackRock's assets under management (AuM)
in equity ETF's to grow from $477 billion in 2011 to $870 billion
by 2017. If however the growth rate were to reduce by even 1%, it
can have a 1.5% downside on our current
$205 Trefis price estimate of BlackRock's stock
You can drag the graph above to see the impact on the stock
full analysis for BlackRock's stock