ETFs: thriving in a time of consolidation

The news that Amundi will buy the exchange traded fund business of fellow French asset manager Lyxor brought to an end a long-running ETF industry guessing game as to who would eventually acquire Lyxor’s €77bn of assets.

The candidates were few, with much of the sector’s consolidation over the last few years driven by big asset managers seeking to get bigger, and private equity buyers keen to join a party that looked set to define the future of investment.

Private equity appetite seems to have waned more recently, with firms no doubt deterred by the challenge of competing successfully in a fierce market where ever-lower margins are the norm, while right now only a handful of asset managers would be willing or able to pay the €825m price tag.

Amundi is a natural buyer for this business, and not only because of a shared French heritage. Under CEO Yves Perrier it has pursued a highly ambitious and successful growth strategy to become Europe’s largest asset manager, and ETFs have played a key role in this.

The deal will see Amundi leapfrog rivals DWS and UBS to become the second biggest European ETF player, putting iShares giant Blackrock in its sights.

“Today we are number two in Europe, far behind BlackRock,” Perrier said after the news broke. “Let’s meet again in five years and we will see that the landscape will have changed very much.”

While this will be the final deal of his tenure, the Lyxor acquisition is no indulgent, CEO-swansong acquisition designed to secure a sense of legacy. Enlarging Amundi’s ETF assets under management is critical for its future, and so these rankings really matter in an industry where increased scale is a driver of success rather than just a reward.

So where does this leave the rest of the industry? How do you survive, let alone thrive, in a market where last year five (now four) firms held more than 75% of total assets?

Like elsewhere in the asset management world and beyond, the answer lies in specialism. Find a niche where you have capability or expertise that allows you to offer superior products that meet specific investor needs, and you can still compete successfully without worrying about how you’re going to knock the Big Four off their perch.

The current appetite for quality ESG exposure, varied fixed income products, thematic investment strategies and esoteric assets, for example, all represent opportunities for boutique players to issue interesting, differentiated ETFs that can command a higher fee.

The real challenge is to convince investors it’s worth it. Unlike active mangers who can (usually) point to the alpha generated by their unique insights, in a beta-driven industry where the obsession with low cost has eroded the concept of value, clients have been conditioned to look for the cheapest option, rather than the best, and often don’t seem to understand there is a difference.

The conversation around ETFs needs to change, for the benefit of the industry as a whole but especially for investors. And as communicators we have an important role to play: improving wider understanding of how ETFs actually work, shifting the narrative from cost to value, and helping specialist players stand out with clear and compelling propositions. This must be the focus, not just where you can buy the cheapest S&P 500 ETF.

The future of the European ETF industry is bright, and not just for the Big Four, but intelligent and effective communication is the key.

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