There are three main ETF players in the local market, and they are likely to remain the dominant players for the foreseeable future. There are also smaller players in the market – notably ETF Securities, which offers a gold-based ETF and has found some investor support.
The big barrier to entry is scale. Baker says that in all developed markets where ETFs are offered, there are three to five successful players, and in most markets the top three generally control about 70 per cent of the ETF assets. Baker says the average gross fee on an ETF is 35 basis points. Laidlaw says the fee on the Vanguard US Total Market Shares Index ETF is 7 basis points.
“There’s not a massive profit margin in these things; you need massive scale”
Competition between ETF providers does not necessarily lead to innovation in fund management styles or techniques; ETFs passively track market indexes and so the result of competition is usually lower prices for consumers.
“There’s not a massive profit margin in these things; you need massive scale – you need billions; lots of zeroes,” Baker says.
The sheer volume of funds needed to run an ETF profitably means they will remain in the realm of major institutions, and it’s extremely unlikely that some of the things commonly done by dealer groups to capture some of the margin associated with managed funds will succeed in the ETF space.
“It’s just too big a scale game,” Baker says.
“Even things like white labelling and joint- venturing look pretty tough. The skills are very different as well. It’s not worth dealing over revenue shares if the revenue pie is only 25 to 30 basis points to begin with.”
Great job Simon, very imformative. The hard thing I find wth ETFs however is transparency of the bid/offer spread. You might be 2% behind when buying even though the market maker is supposed to be as close as possible to the NAV.