The process seems a relatively simple one. Smaller issuer launches innovative ETF and when it starts seeing some traction, the bigger player comes in and brings to market in a few weeks a matching product either tracking the same index or one very similar.
This problem is a particular issue in Europe as bigger issuers can leverage their distribution networks across the fragmented regions, something which a smaller player could struggle to do.
A good example of this is when ETF Securities launched its robotics and automation ETF (ROBO) in October 2014. BlackRock saw this gather significant assets, some $809m as at 18 June, and subsequently unveiled its version (RBOT) in 2016 which has gathered $2.5bn assets since launch.
The question is though whether this is a big deal and the answer is it very much depends on what side of the fence you sit on.
BlackRock I am sure would argue they are tracking a different index so are offering investors a slightly differentiated exposure at half the cost (0.40% versus 0.80%). This cost savings is massive for investors over the long term.
However, some might claim this is structurally a long-term issue for the European ETF market as the big players will simply get bigger while the smaller players will be shoved out which subsequently reduces competition.
Having success in Europe is hard enough – see BMO GAM – without having the big issuers copying your products. This could result in less asset managers launching an ETF range at the detriment to investor choice.
If the market wanted to tackle copycat ETFs, there are some solutions such as introducing a delay on the exchange so products have to wait a certain amount of time before launch or regulators could enforce some sort of rule.
However, as Athanasios Psarofagis, ETF analyst at Bloomberg Intelligence, who was named in ETF Stream’s Industry 30 2020, said: “Nothing can really be done about it, that is just the market and competition.”
It also brings into the argument the question about what constitutes intellectual property. Is Invesco’s decision to also track the MSCI Kuwait index six months after HANetf came to market with their ETF a problem on this point? I would argue no.
There is still a huge amount of room for ETF innovation in Europe. One only has to look at Tabula Investment Management’s line-up or First Trust’s Low Duration Global Government Bond UCITS ETF (FSOV) to see ETF issuers are offering differentiated tools for investors to incorporate within their portfolios.
So while copycatting on the surface may seem like a big issue, the ETF issuers that truly innovate will reap the benefit from a European market that is still some way off maturing.
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