ETF War of the Goliaths

July 13th, 2012
in contributors

by Guest Author Dan Weiskopf, Forefront Capital Management

goliath-right-120x184goliath-left-120x184The battles of the Goliaths that is playing out in the ETF Industry and the impact that they will have on the overall trillion dollar asset management industry certainly has the potential to keep many Business Schools busy writing case studies. Future growth of the ETF market place within the next 3 years is clearly dependent upon many uncontrollable variables so it should not surprise to anyone that the range of growth estimates is so broad (13-25%), but that does not mean that strategic business decisions will not be made.

Follow up:

This battle had an interesting twist two weeks ago, the last day of the Second Quarter, when Goldman Sachs initiated coverage on WisdomTree Investments (NASDAQ:WETF) stock[1]. This Buy Recommendation was particularly noteworthy because the 20% CAGR (compound annual growth rate) projections for the U.S. ETF market growth contrast a June 12th report by Sanford Bernstein. Sanford Bernstein’s catchy title ”Will ETF Growth Hit a Wall?” projected ETF growth rates in the range of 13-17% and made for interesting headlines since historical growth rates have been in the 25-27% range. Bernstein’s asset management business, like Fidelity, remains on the sidelines in the ETF market so it is arguably no surprise that their growth estimates would be on the conservative side. Nevertheless, these two contrasting views set the stage for how 6 different significant leading financial service firms view the ETF market as well as the potential opportunities and implications that the ETF market will have on the overall asset management industry.

Goldman vs. Sanford Bernstein: Top Down View from two Goliaths

What is interesting about the differences between the Goldman and Sanford Bernstein reports are the following:

  • Bernstein makes the point that most of the easy growth from passive broad indexing is covered and growth through active management will be more difficult to achieve. Goldman’s emphasis on WETF assumes that it will get above market penetration at 1.9% as a result of active ETF products which have outperformed their benchmarks. Goldman highlights that 13 firms now have funds registered under active structures.
  • Bernstein makes no mention of WisdomTree, but the Goldman reports it a buy recommendation in part because WETF’s “valuable exceptive relief asset”. (Exceptive relief is a critical SEC requirement for active ETF products.)
  • Goldman highlights the market trends for RIA’s going independent as a critical driving force for ETF demand, but Bernstein looks at passive ETF index investing as being closer to saturation levels. Bernstein’s analysis is a classic strategic versus tactical argument that lacks an appreciation of many core benefits of ETF; i.e. transparency, liquidity, tax efficiency and asset diversification.
  • Bernstein emphasizes that the difference between their 13% and 17% growth estimates comes in the form of defined contribution success. Goldman does not mention this as a core driver perhaps in part because 401k and defined contribution presently is not assumed to play a key role for WisdomTree; although the firm was in fact an early mover in this area.

Pimco vs Fidelity: Two Top Goliath’s take opposite strategic paths to fight for market share

ETFs have been a clear market share winner over mutual funds for the past 5 years and yet Fidelity continues to remain mostly sidelined. Pimco, on the other hand, launched an effort about 18 months ago and recently with great fan fair launched a product extension to its franchise Total Return Product and within 4 months looks to have gained nearly $1.7 billion in AUM (assets under management).  Most importantly, this launch does not look to have cannibalized the firm’s current product offering or necessarily its pricing.  In total, PIMCO now has 19 products and ETF assets of $6.2 billion. It is anticipated that Fidelity will eventually capitulate and launch a family of ETFs, but evidence of its moves have been very slow.

A dam may be breaking, but the slow leak is not enough to force it to play offense. Fidelity is in an excellent position from a distribution, potential product and platform position so arguably it can wait, but the largest issue may be size and culture. Moreover, they may have an issue that if they move offensively they will accelerate the growth rate of the ETF market. PIMCO’s actions have had a hugely positive effect on the growth of the active segment of the ETF market place.

BlackRock-iShares vs. Vanguard: Goliath’s battling by breadth of product offering vs, pricing

Vanguard, has a long history of being the low cost provider of index products, and its patent position has clearly given the firm a competitive advantage in price and products structure. However, further innovation and limited breadth makes its growth strategy very narrow.  A classic example that “price matters in the absence of value”.  Investors looking to get core exposure to broad indexes will choose Vanguard lower costs solutions, but when they move tactically they may look to BlackRock products which tend to be more transparent and liquid.  BlackRock also is positioned with the largest number of ETFs, the largest sales force and a clear advantage of scale as the largest asset manager.

In the first half of 2012, BlackRock came out aggressively swinging and further expanded it share of wallet opportunity with over 40 new ETFs.  More products, can be important for tactical managers who are developing new strategies.  Both Vanguard and BlackRock are very tuned into the rapidly growing RIA market, but they see their value proposition differently.

Conclusion:  The Battle of the Goliaths is just beginning

The future growth rate of the ETF market is challenging to estimate, but whether it is 13% or 30% it is here to stay!  There was no mention about SSga (State Street Global Advisors) or many of the 40 or so small players in this quick note, but that will follow in a future piece.  Mostly this was written as a teaser for when the more comprehensive piece is completed.  As an ETF strategist, an ETF tactical portfolio manager and an early adopter of ETFs, observing the evolution and revolution that is taking place in this market is fascinating. Whether I end up reading or writing a case study about this market will be a matter of time.


[1] Clients as well as the managers own positions in WisdomTree (NASDAQ: WETF) and actively trade in the shares; including the day that this opinion was written. However, this is neither a solicitation or a recommendation on this security!


Disclaimer: The information contained in this market commentary has been compiled by Forefront Capital Management, LLC from sources believed to be reliable, but no representation or warranty, express or implied, is made by Forefront Capital Management, LLC, its affiliates or any other person as to its accuracy, completeness or correctness. All information is presented as of May 31, 2012, and is subject to change without notice to the recipient.

Under no circumstance is the information contained within this document to be used or considered as an offer to buy or sell or a solicitation of an offer to buy or sell any particular security. Nothing in this report constitutes legal, accounting, or tax advice or individually tailored investment advice, or research. This material is prepared for general circulation to clients, and does not have regard to the particular circumstances or needs of any specific person who may read it. The recipient of this report must make his or her own independent investment decisions regarding any securities or financial instruments mentioned herein. Past performance is not indicative of future results.

To the full extent permitted by law neither Forefront Capital Management, LLC nor any of its affiliates, nor any other person, accepts any liability whatsoever for any direct, indirect or consequential loss arising from any use of this market commentary or the information contained herein. This document may not be reproduced, forwarded or copied by any means without the prior consent of Forefront Capital Management, LLC.   For more information, please visit our web site at Indexes, such as the S&P 500 and MSCI All World Equity, are unmanaged and have no fees or expenses.  An investment cannot be made directly in an index. Forefront’s strategies consist of securities which vary significantly from those in the S&P 500 and MSCI All World Equity indexes.  Accordingly, comparing results to those of the indexes may be of limited use.  (Source of index information: Bloomberg)  The S&P 500 tracks the performance of the equity securities of a representative sample of 500 U.S. based large-cap companies.  The S&P 500 is an unmanaged, market-value weighted index with each stock’s weight in the index proportionate to its market value.  The MSCI ACWI Index is a free-float weighted equity index.  It was developed with a base value of 100 as of December 31 1987. MXWD includes both emerging and developed world markets.


©Forefront Capital Management, 2012, All Rights Reserevd.

Published here with written permission of Forefront Capital Management.

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