157-A Concentrated Industry
Over the last few years, the exchange traded fund (ETF) business has exploded as the advantages of exchanged traded funds attract investors away from individuals picking stock or investing in mutual funds. (See Audio “Tip #1: Defining a Business” on StrategyStreet.com) The industry manages nearly three quarters of a trillion dollars in assets.
Many fast-growing industries are not highly concentrated. This industry is concentrated. The top three providers control 84% of assets under management. In the average industry, it takes about four competitors to control 84% of the industry.
The ETF industry leader, by far, is BlackRock. BlackRock recently bought the iShares operation from Barclays Global Investors. It bought a very successful business. BlackRock manages 49% of the assets invested in ETFs. This compares with the median number one player in an industry at 39% market share.
The second player in the industry is State Street Global Advisors. This company has a 23% market share. Their 23% compares with the median number two competitor in an industry with 18%.
The third player in the ETF industry is Vanguard. Vanguard owns a 12% market share. This market share is not far off from the average number three competitor in an industry, at 11%.
From the share statistics, it is clear that the unusual concentration in the ETF industry rests primarily with the top two players.
These share concentration ratios for the ETF business may fall over the next few years. New competitors are pouring in the door, offering alternative ETF vehicles. But the big changes are likely to come from Charles Schwab. Charles Schwab has begun offering ETFs with commission-free trading, in other words, lower prices.
As fast-growing industries develop, their early stages witness a predominance of Function innovations, where companies offer something new for the user of the product. As the innovations in Function begin to wane, fast-growing industries witness more price-based competition. This price-based competition then leads to a period of shake-out in the developing industry. (See “Audio Tip #34: How Does a Company “Win” in a Market?” on StrategyStreet.com.)
It looks like Charles Schwab has fired the first major shot in this price-based competition in the ETF business. It should be an interesting battle. (See the Symptom & Implication “The industry is seeing its first price wars” on StrategyStreet.com.)
With new competitors swarming into this fast growing market, the industry is less concentrated than it was in 2009. The top three leaders remain the same but their total share is now just 77%, much more like a typical industry. The big winner has been Vanguard who more than doubled their market share with their low prices.
The market shares in 2022 of the top five providers of exchange traded funds in the US is as follows:
– BlackRock 34%
– Vanguard 29%
– State Street 14%
– Invesco 6%
– Charles Schwab 4%
BlackRock and State Street have allowed Vanguard to gain share with its lower prices. This price disparity has lasted an unusually long time. These two industry leaders are in a Leaders Trap and will watch Vanguard become the industry leader if they do not adjust their pricing. See HERE for an explanation.
THE SOURCES FOR STRATEGYSTREET.COM: For over 30 years we observed the evolution of more than 100 industries, many hostile. We put their facts into frameworks applicable to all industries and found patterns. Strategystreet.com describes the inductive results of these thousands of observations and their patterns.