Vanguard Challenges BlackRock’s ETF Dominance with European Push

By Trefis Team,

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BlackRock's ( BLK ) $13.5 billion acquisition of Barclays Global Investors in December 2009 brought with it the world's leading Exchange Traded Funds ( ETF ) 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 ( STT ) 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 the world.

Why is the European ETF Market Crucial?

  1. 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.
  2. 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 ETF Market?

  1. 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.
  2. 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 price.

See our full analysis for BlackRock's stock .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing , Investing Ideas , Stocks , US Markets
Referenced Stocks: BAC , BLK , ETF , STT , WFC

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