Buying into the US boom in ETFs
PORTFOLIO POINT: Australia has a number of exchange traded funds on offer, but when one looks offshore the range of ETF opportunities is enormous. The good news is, you can invest in them too.
Private equity firms may be on the nose, but there’s no denying the deep-pocketed dealmakers behind them know how to sniff out a bargain.
So Australian investors wanting to leverage the high $A should take note as the private equity industry descends on companies linked to the world’s $1 trillion-plus exchange traded funds (ETF) industry.
Regular Eureka Report readers will be familiar with ETFs, which usually offer long and short exposure to a variety of stocks, commodities and bonds. Michael Feller has already outlined some of the “plain vanilla” funds listed on the Australian Securities Exchange, where the asset class is starting to gain momentum. But the industry has been booming for years in the US, where close to 1,500 ETFs track everything from silver to smartphones.
Private equity companies have noticed the trend. This month, Gencap Ventures, which is owned by Texas’s Esposito Private Equity Group, pounced on FactorShares, a US ETF provider with $15.4 million in assets under management.
The takeover follows FTV Capital’s successful investments in ETF sponsors including ETF Securities and Velocity Shares. According to the Financial Times, private equity players are also scouring bordering sectors, such as the burgeoning field of ETF investment strategists.
Not only are ETF businesses high growth, they also boast massive profit margins – north of 40% in many cases. ETFs may bring in less fee income than managed funds, but they’re cheaper to run.
While the privately-owned companies mentioned above are out of reach for retail investors, a new report by New York-based research house, S&P Capital IQ, suggests there are bigger ETF bets available on the bourse. According to Capital IQ, the publicly-traded financial titans BlackRock, Invesco and State Street Global Advisors currently command more than 70% of the global ETF market.
It’s no surprise to see BlackRock at the top of the list – the world’s largest fund manager is also its most popular ETF provider. BlackRock’s iShares unit comprises more than 260 ETFs and, with US$482 billion in assets under management, boasts about 41% of the global ETF market.
BlackRock, which is listed on the New York Stock Exchange, doesn't separate its iShares income, but the franchise was estimated to account for about 27% of the firm’s total $US8.6 billion in annual revenue last year – some say more. Since then, BlackRock has engulfed Canadian ETF provider Claymore Investments. The financial heavyweight is also muscling into the ETF investment strategy space, with a service that connects financial advisors with a fast-growing class of ETF portfolio managers.
Of course, BlackRock is also a major provider of mutual and closed-end funds and managed accounts. To put the exposure into perspective, ETF revenue is to BlackRock roughly what iron ore income is to BHP Billiton – which is nothing to sneeze at. While the Big Australian’s big-budget expansion plans appear to have been put on hold, BlackRock continues to grow its iShares business relatively cheaply.
The next-biggest public ETF companies also have meaningful exposures, although they become more tangled in the firms’ other lines of business. State Street, which engineered the very first ETF — the SPDR fund, which tracks the S&P 500 stock index — has about 24% of the world ETF market. Invesco, which owns ETF sponsor PowerShares, controls around 5.5%.
That brings us to a company that doesn’t make the Capital IQ list, but which is still worth examining: WisdomTree Investments. The company is currently the only pure-play ETF provider available to retail investors, which makes it quite attractive.
WisdomTree, which celebrates its first anniversary as a Nasdaq-listed stock this week, manages 48 ETFs with US$15 billion in assets, making it the seventh-largest ETF provider in the US, according to the ETF Industry Association.
The six-year-old firm’s $810 million market capitalisation puts it firmly in small-cap territory (somewhere between the size of Spotless Group and Virgin Holdings). But the company’s latest results, released last week, show the business is growing strongly: it increased assets under management by 16% in the past 12 months, compared to BlackRock’s 2%. The firm turned its first profit in 2011, and expects to remain in the green.
Goldman Sachs launched coverage of WisdomTree this month with a “buy” rating, as a direct bet on the continued expansion of the ETF industry (Goldman expects ETF providers to manage more than $US2 trillion in assets by 2015, which amounts to a compound growth rate of 20% per year). The broker also points to the company’s organic growth profile, the scalability of its model and its likelihood to become a target for acquisition-hungry asset managers.
The stocks listed above can be bought directly through most Australian brokers, although the fees might be higher than what you would pay for ASX-listed buys. As for index products, the KBW Capital Markets Portfolio ETF has a significant exposure to State Street and Invesco (as well as Charles Schwabb, a smaller ETF provider). However, BlackRock and WisdomTree are largely unrepresented, outside funds that track broader indices such as the S&P 500 or Russell 2000 group of small-caps.
Oddly enough, there aren’t currently any ETFs that track ETF providers. Surely it’s only a matter of time.