As the U.S. ETF industry has grown to nearly 1,000 products and $800 billion in assets, the pace of innovation in the industry has been remarkable. As issuers have rushed to claim their spot in the rapidly-expanding space, most have focused not on duplicating existing products, but rather being first-to-market with a unique type of investment vehicle. Most of the product launches in recent years have been the first-of-their-kind, offering exposure to an asset class, region, or investment strategy not previously covered by ETFs. As a result, the ETF industry is, in some ways, far less competitive than the mutual fund space; head-to-head battles for investor assets aren’t nearly as common.
Still, there are a number of intriguing battles brewing between generally similar ETFs from different issuers. Below, we profile five head-to-head matchups that may go a long ways in shaping the competitive landscape in the ETF industry in coming years:
These two ETFs both track the MSCI Emerging Markets Index, and both are among the five largest products by total assets. iShares’ EEM has historically been the default option for achieving emerging market exposure through ETFs, but VWO’s remarkable growth in recent years has positioned the competing Vanguard product as a legitimate threat.
In May 2009, VWO’s assets stood at $8.6 billion, about 28% of EEM’s total at the time. But over the last year, VWO has closed that gap, thanks in large part to its more attractive expense ratio (it charges 0.27%, compared to 0.72% for EEM). Since then, VWO’s assets have grown by more than 175%, compared to just 8% for EEM.
Many have pointed to VWO’s ascension as proof that ETF investors are beginning to consider relative expense ratios more carefully when evaluating options. If VWO continues to make up ground on EEM, it could set off a series of “price wars” within the ETF industry.
2. Market Vectors Indonesia ETF (IDX) vs. iShares MSCI Indonesia Investable Market Index Fund (EIDO)
iShares has established itself as the dominant player in the industry in part because of a significant first-mover advantage. The firm was first-to-market with dozens of products, ranging from inflation-protected bonds to physically-backed commodity products. As the early movers in the ETF industry, iShares’ funds built up impressive asset bases and trading volumes, making it difficult for start-up funds to challenge for market share.
When iShares launched EIDO last month, it found itself in an unfamiliar position: the second-mover trying to compete in a niche dominated by a well-established ETF (in this case, the $300 million IDX). As it looks to strengthen its grip on the ETF market, iShares will likely find itself in this position more often–EPOL is also going head-to-head with a more established Van Eck product.
If iShares has success in overtaking IDX with its new Indonesia ETF, anxiety will likely run a little higher within the industry.
3. iShares Barclays TIPS Bond Fund (TIP) vs. All Takers
Following the unprecedented injections of liquidity into the global financial system in recent years, inflation has been on the minds of most investors. So far, anxiety over an uptick in prices has been a major boost for the inflation-protected bond ETF from iShares, which saw inflows of about $1.6 billion in the first five months of the year.
So far, CPI figures have been relatively tame–deflation has actually been more of a concern in many areas. But most investors still expect prices to head higher at some point in the future, and they’re clearly hoping that TIP will protect them from the ravages of inflation.
If/when an uptick in inflation materializes, it will be interesting to see how investor preference for “inflation proof” ETFs changes; there are a number of far less popular funds that may serve as effective hedges.
ETFs have been praised for bringing access to every corner of the global economy within reach to all types of investors. For this, they have received far too much credit. While there are ETFs focusing exclusively on equities listed on exchanges in nearly every major market, most of these products are heavy on mega-cap stocks that maintain operations around the world.
In recent years, a number of small cap international ETFs have popped up, offering exposure to companies that are impacted more directly by local demand in various regions. As such, these funds are very different from those that focus on the largest and most liquid stocks; they generally offer more of a “pure play” on the local economy.
The composition of EWZ and BRF is very different, but for investors looking for exposure to Brazilian equities they are in direct competition. It will be interesting to see how successful small cap international ETFs are in attracting assets that have historically gone into large cap funds.
5. PowerShares’ Small Cap Sectors vs. State Street’s Sector SPDRs
A growth in small cap equity ETFs isn’t exclusively an international phenomenon; PowerShares recently rolled out a line of ETFs focusing on various segments of the S&P SmallCap 600 Index. Investors looking to tilt their portfolio towards or away from a certain corner of the economy have historically used the sector SPDRs from State Street–products that divvy up the S&P 500 into nine pods based on the industry classification.
The new PowerShares products are intriguing for a number of reasons, and offer an alternative for going long or short a particular sector. They should compete with the well-established sector SPDRs for use by those employing a sector rotation strategy.
Disclosure: No positions at time of writing.
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