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moneysense.ca, 29/01/12
iShares + Claymore is not good for Clients
Recently, BlackRock which offers 48 ETFs in Canada under the iShares label announced that it will be acquiring Claymore Canada, a vendor of 34 exchange-traded funds. The press release accompanying the announcement said that the transaction enhances BlackRock’s ability to “deliver excellence in innovation, quality and choice”.
According to the Canadian ETF Association, iShares is already the dominant player in the ETF sector with a market share of 67%. Claymore currently occupies the #2 slot with a market share of 15.5%. When the deal is consummated (unfortunately, it is likely a question of “when”, not “if” the deal will be approved, because BlackRock can probably successfully argue that its market share of the overall fund business is fairly small), BlackRock’s market share will become even more dominant at 82.5%. Or look at it this way: iShares currently has 13 out of the 20 largest ETFs by assets under management. After acquiring Claymore, BlackRock will have 18 out of the top 20 ETFs.
It is true that other ETF vendors are competing strongly. In 2011, BMO was virtually tied with iShares in net ETF creations at 33%. Claymore occupied the #3 spot with 20%. Combining iShares with Claymore (Jon Chevreau cleverly dubbed the combination “ClayShares”) would mean BlackRock would have more than 50% of the 2011 ETF sales to go along with its dominant position in the ETF landscape. It is hard to see how the creation of a virtual monopoly will deliver innovation and choice for ETF investors.
moneysense.ca, 29/01/12
What about Vanguard? They’re just getting started in Canada, and I think it’ll be interesting to see what effect their entry will have on the market, especially as the breadth of their Canadian offerings improves. The big five banks are also starting to wake up to ETFs, and I think they have the resources to shake things up if they decide to.
I agree that it looks bad when you consider the historical market shares of these two firms, but looking forward I’m personally not too concerned with this merger.
I agree that this is not a positive development for investors. The silver lining is Vanguard’s entry into the Canadian market. We need competition.
I think the big banks in Canada will gain considerable share in the ETF market. It will take some time but Canucks sure do love … trust … their banks and our banking system.
As for this new – ICK. Think about market share of other major companies. FB owns social networking, McDs in fast food, Apple in Smart Phones. But this lions share in the financial market is mind numbing. You don’t see dominance like this, in something “important”, aside from the fact it seems Google owns Internet business.
Canada is a small market which seems to have such dominance by small numbers of industry giants (oil, gas, mining, potash, telecom, banks, utilities) – we don’t need to see the ETF market get cornered.
Are Assets Under Management equal to Market Share? Even if they were, I don’t see how a bigger market share would be an advantage for too long when all consumer loyalty for ETFs is based solely on high returns and low MERs.
Hey….if they can sell it they’ll develop it iShares taking it over might streamline the market (but I doubtit). Great post as usual CC!
@Michael Davie: Even if you look at current share of the market (ETF net creations), the combination of Claymore and iShares will push BlackRock’s share from 33% to over 50%. At the very least this should cause some competition concerns.
@Michael James: I agree we need more competition, not less. However, I think this deal will get done because BlackRock can successfully argue that they are a small player in the overall fund business.
@Sustainable PF: I agree. Oligopolies are bad enough; monopolies are much less desirable. I also think Banks will be successful in the ETF space mainly because of their presence in the mutual fund market.
@Vittorio: In the ETF space, the first mover has tremendous advantage. It may take years and years for a new competitor undercutting in price to gain traction. Example: VEA has 1/3 the cost of EFA but still is only a small fraction of EFA’s assets even 5 years after launch.
@Brad: It would be interesting to see what happens. I’m thinking that we’ll see some consolidation. There are some overlapping products in the combined entity mainly in the fixed income space. These funds might get merged. I’m speculating here, of course.
After acquiring Claymore, what are the 2 of the 20 biggest ETF’s that Blackrock would not own?
@Cal: The two ETFs are BMO Covered Call Canadian Banks ETF (#17) and the BMO Dow Jones Canada Titans 60 Index ETF (#19).
@Robillard: I don’t see BlackRock dropping fees. EFA and EEM were severely undercut by Vanguard but the iShares MERs stayed pretty much the same. IMO, there will be even less motivation for ClayShares to drop the fees.
@Cal: I’ll look it up in the evening. Off the top of my head, I think it was two BMO ETFs but I have to look this up.
While I generally agree that consolidation among ETF providers should lead to reduced competition, and potentially higher management fees, it is possible that BlackRock may use its dominant position to compete even more fiercely with mutual fund management companies, which would be a net good for investors. ETFs are generally not a separate asset class. They fulfill basically the same role filled by traditional mutual funds. By acquiring Claymore, BlackRock may be able to achieve even larger economies of scale in its back office, and could possibly lower its management fees further. That would clearly signal that they intend to take on the mutual fund managers. We just have to wait and see what happens.
@Robillard: I don’t see why BlackRock would have to reduce MERs to compete with mutual funds. The gap is so large that they could double most of their MERs and still look like a great alternative to mutual funds. The only force I can see that would make them want to reduce fees is Vanguard.
Robillard wrote: “and could possibly lower its management fees further”.
When has Blackrock ever lowered its management fees?
While we’re at it, has any ETF provider in Canada lowered their fees?
@CC: I fully agree: Significantly reduced competition is always bad for clients.
@Micheal
Perhaps another force would be the Competition Bureau should it fall under its jurisdiction.
[...] Canadian Capitalist said BlackRock’s acquisition of Claymore is not a good thing for clients, saying “after acquiring Claymore, BlackRock will have 18 out of the top 20 ETFs” based on assets under management. [...]
Because of a “change in manager control”, unit-holders will get to vote on or before February 24, 2012. It will be interesting to see how Canadian banks who are nominee holders for all of these Claymore funds, respond… whether as fiduciaries, they will choose to vote and/or make their positions clear on the sale of Claymore to Blackrock.
I wish we had more ETF options with a better MER in Canada, would help me get out of the rat race! lol
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