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Invesco to Acquire Source ETFs

Invesco has entered into a definitive agreement to acquire Source ETFs. According to the two parties, the acquisition is expected to be completed in Q3 2017

Jose Garcia-Zarate 27 April, 2017 | 3:50PM

Invesco has entered into a definitive agreement to acquire Source ETFs. According to the two parties, the acquisition is expected to be completed in Q3 2017, subject to regulatory approval.  The news of the acquisition come after months of speculation about the future of Source. Back in October 2016, the private equity firm Warburg Pincus, which owns a majority stake in Source, announced it was seeking a buyer. 

Source is currently the seventh-largest exchange-traded-product provider in Europe, with a market share of 3.8%. By contrast, Invesco, one of the top 5 largest ETF providers in the United States, has struggled to make inroads in the European marketplace, where it has a meagre market share of just 0.4%. 

As of now, the combination of the two houses would still leave the resulting entity ranking in seventh place in a European ETF market league table where the three largest players - iShares, db x-trackers and Lyxor - control close to two-thirds of the total AUM.  In any case, news of this buyout is likely to further encourage talk of consolidation in the European ETF providers landscape.

In terms of the practicalities of merging the product line-ups; Source currently offers a range of mainstream plain vanilla ETFs, whereas Invesco has focused on the development of strategic beta ETFs. On paper, there isn’t too much in terms of overlapping, which might facilitate integration. 

Having said that, there remain some important decisions to be made. Source differs from all other major European ETF providers in that it outsources all fund-management responsibilities. As such, Source is best described as an ETF distributor. By contrast, Invesco manages their own ETFs. Besides, the vast majority of Source ETFs are synthetically replicated, whereas Invesco’s entire Powershares-branded ETF range is physically replicated.

As Invesco is the buying entity in this deal, this could mean a switch in replication methodology for the Source ETFs as well as the in-housing of management duties and thus potential termination of Source’s existing strategic partnerships with the likes of PIMCO, Goldman Sachs or LGIM.

In any case, the deal could be an opportunity for Invesco to finally make a mark in the European ETF marketplace. Invesco has scale – as evidenced by their successful US operation – and can now benefit from Source’s know-how in relation to the intricacies of the European marketplace.

Morningstar does not currently assign Analyst Ratings to any ETF from Source or Invesco in Europe. However, we carry out standard due diligence on a number of their products, and so we will closely monitor developments in coming months and update information as necessary.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

About Author Jose Garcia-Zarate

Jose Garcia-Zarate  is Associate Director of Passive Strategies Research for Morningstar Europe