The exchange traded fund market is an area in which Barclays Global Investors can lay solid claim to being more successful than State Street Global Advisers. BGI has built up its ETF business (iShares) in five years to a level of $178 billion, compared with SSgA’s $80 billion.
In theory, this shouldn’t have been the case. SSgA developed and launched the ETF market with the American Stock Exchange in 1993 with the Standard and Poor’s Depositary Receipt (the Spider), the first and still the largest ETF, with assets of $47 billion. Given the significant headstart, the 47% share of the ETF market today ought to be SSgA’s, not BGI’s.
The way BGI handled the launch and development of its iShares products clearly indicates the new aggressive mood that has taken hold of the once sleepy manager, and is surely accountable for its success in the area.
BGI knew it needed to extend its customer reach to retail clients. “At first we thought we needed a mutual fund company, but knew we didn’t have any expertise in this area and would have had to hire a huge sales force,” says Chris Sutton, CEO iShares Europe & Asia ex-Japan. Having gained some experience in the area in 1996 by advising Morgan Stanley on its ETF product, WEBS, BGI realized that if it could lift its indexed products on to an exchange it could gain access to that same mutual fund client base.
When it launched iShares in 2000 it did so with gusto. “We had a vast budget for advertising and education,” says Lee Kranefuss, CEO of the intermediary investor and ETF business at BGI. “We’d conducted market research and realized that advisers didn’t even know what ETFs were, so we had a huge advertising campaign, went on roadshows, created a website for advisers. We basically went out and evangelized ETFs.”
In addition, BGI made sure its product offering was broader than those available at the time. In 2000, ETFs were limited to a selection of indices. The Spider, for example, was benchmarked against the S&P, the Diamond against the Dow Jones, Webs against the MSCI. When BGI launched IShares it created products “on every brand name index that anyone would want,” says Kranefuss.
A senior executive at a competing firm says: “BGI possibly put too many types out there initially, but it had spotted that ETFs were good in a cost-competitive world and so went for it.” He adds: “ETFs are high cost to launch and at BGI the group swallowed those costs. But when they gained traction, it meant that all the gains went to Barclays. SSgA was more constrained as it shared the development costs with others so had to give away some of the upside to its partners. The result is that BGI has managed to make it a more profitable line of business.”
SSgA CEO Bill Hunt concedes that his firm’s position in the ETF marketplace has fallen markedly. “Five to six years ago we had a 74% market share,” he says. “Now, it’s around 23% and the likes of Vanguard and BGI have overtaken us. We made other choices such as focusing on the active quantitative space. You can’t do everything at once.”
Hunt says that the firm is still an innovator in the ETF space, with more than 30 products in the market. Indeed, SSgA launched the first gold ETF, the first fixed income ETF and has also launched a series of niche Asian ETFs. “It’s not that we are retreating from the US,” he says. “We still manage the Spider after all. We’re just looking to new areas.” In November, SSgA also launched nine new ETFs in niche sector and style areas.
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