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Monopoly Concerns Hit ETF Market

Is BlackRock-owned iShares getting too big and gaining too much market share in Europe?

Lee Davidson 5 March, 2013 | 8:00AM

European exchange-traded product (ETP) providers have been jockeying for investors' money in an increasingly competitive environment. One recent announcement by the current market leader, iShares, has raised some eyebrows: Blackrock-owned iShares agreed to a deal in January to purchase Credit Suisse’s ETF business. At this point, BlackRock’s acquisition of CS ETF is expected to be finalised in June and some market observers are worried a monopoly or oligopoly could be forming in the ETF space.

Some analysts have lamented that iShares is just too big—and they may have a point

Once the deal closes, iShares’ market share will increase to a massive 43% of European ETP assets. (Keep in mind that Deutsche Bank's db X-trackers is the second-largest ETP provider, but has only captured about 13% of the market. Lyxor is the next largest provider with an 11% market share.)

With such a large market share, some analysts have lamented that iShares is just too big—and they may have a point. According to data from a February 7th 2013 report from Deutsche Bank, the ETP industry may be pushed from a moderately concentrated market to a highly concentrated one after BlackRock’s acquisition.

The Herfindahl-Hirschman Index (HHI), a commonly used measure of industry competition, currently sits at 0.22, indicating a moderate amount of concentration. If BlackRock’s acquisition of Credit Suisse’s ETF business were to take place today, the HHI would jump to 0.27 indicating a high degree of industry concentration.

New ETF Competitors Continue to Enter the Market

The fact that barriers to entry in the ETF marketplace are so low should be a welcome counter to the argument that the European ETF industry is overly concentrated. To prove this point, in February, the European ETF marketplace was awash with news of new entrants.

On the London Stock Exchange, Finex Capital Management launched their first ETF. This ETF allows investors to access Russia’s corporate bond market for the first time. Furthermore, Finex plans to launch other ETFs aimed at providing exposure to Russia as well as cross-listing their products across other major stock exchanges in Europe, including Moscow.

In January, Vanguard—the US asset manager known for providing exceedingly low-cost ETFs—launched its second batch of ETFs in Europe by floating three products on the Swiss exchange complementing its existing line-up of five ETFs on the London Stock Exchange.

Hot on their heels, three major ETF providers – Boost ETP, Lyxor, and Ossiam, all announced their intention to cross-list or launch ETPs in Switzerland. This interest in Switzerland correlates with a recent trend of Swiss investment professionals and private banks allocating more of their portfolios to passive products, according to Ignites Europe.

Finally, following Vanguard’s lead, US asset manager First Trust Advisors announced in February their intention to launch three AlphaDEX ETFs on the London and Dublin Stock Exchanges, respectively.

The sum of all these actions certainly does not indicate that Europe has an overly concentrated ETP industry. Indeed, the new entrants into the European ETP marketplace speak to the fact that competition is still healthy. If BlackRock did indeed possess monopolistic powers, then all this effort would be for naught. As it is, new ETP providers are still arriving on the scene, new products are still being launched, and new markets are still being tapped. 

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About Author Lee Davidson

Lee Davidson  is an ETF analyst with Morningstar Europe.