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ETF Firms Expand Menus to Fend Off New Providers


As new competitors continue to flood the market with exchange-traded funds, established players like Barclays Global Investors, State Street Global Advisors and Vanguard are adjusting their lineups and launching products to maintain their dominant market share.

Four companies - Barclays (58.4%), State Street (26%), Bank of New York's Hamilton Funds (8.4%), and Vanguard (4.6%) - dominate the industry, managing 97.4% of the ETF market. However, their share has diminished 1.6 percentage points in the past year as more providers have entered the market, according to data from Financial Research Corp (FRC).

"There is a certain gold-rush mentality going on right now," said Gary McDonald, a principal with State Street. "The industry has had 40% to 60% growth annually over the last couple of years. Everyone's interest is piqued."

The excitement in the industry is warranted. In the past year, assets in U.S. ETFs have increased 39.1%, to $341.3 billion, according to FRC, which predicts the worldwide total, currently $857 billion, will reach $1 trillion by 2010.

Joseph Keenan, a managing director and head of U.S. fund services sales at Bank of New York, expects another 180 to 200 ETFs will be launched in the next 12 months. "This is really an enormous growth story," he said. In the first half of this year, 62 ETFs were launched, including 28 from providers other than the four largest ones.

Keenan expects Barclays, State Street and Vanguard will continue to get the "lion's share" of the assets, but that their share will decline as the number of providers increases. "They won't control 70% to 80% of the market anymore, but 50% to 60% of a $1 trillion market isn't a bad place to be," he said.

Barclays manages the iShares funds, which had $199.5 billion of assets as of June 2. This year it has launched 10 sub-sector funds for advisers to sell to retail investors and a currency one that focuses on the silver market.

Lance Berg, a spokesman for Barclays, said it is not concerned by the fact that four companies -WisdomTree Investments, Deutsche Bank, Victoria Bay Asset Management and ProShares Advisors - launched their first ETFs funds this year. "We hear from our clients and from advisers that they want to invest in ETFs that have a strong track record," he said, adding that Barclays is confident it will maintain its market-leading position. According to FRC data, his company has attracted 79% of the $31 billion of inflows into ETFs this year.

But the new competition has hit State Street and Bank of New York the hardest. According to FRC, State Street has lost 4.2 percentage points of its market share, and Bank of New York has lost 2.9 percentage points.

McDonald said fund flow data often can be misinterpreted, particularly over short periods. Since the funds are used predominantly by institutional investors, a few large trades can lead to net outflows, he said. State Street, which launched the industry's first ETF in 1993 and now has $100 billion of ETF assets, launched six funds in June and plans to launch more this year, including niche products to keep up with market demand. "There is a real lab environment here," McDonald said.

Vanguard has increased its ETF assets under management 40% in the first seven months of this year to $16 billion. It launched an additional ETF in April, and this month plans to launch two more, the Vanguard Mid-Cap Value ETF and the Vanguard Mid-Cap Growth ETF.

To keep up with the growing array of funds, Bank of New York is planning to start an ETF center in November to provide retail investors and advisers with information and education about these products.

Barclays, which launched its first ETF in 2000, will continue to analyze the market and will launch some commodity-based and fixed-income funds this year. "There is room to grow," Berg said. "This is just the tip of the iceberg for ETFs. There are a lot of opportunities for a lot of competitors. But our products are based on traditional indices, and that is basically what our clients are looking for."

John Woerth, a spokesman for Vanguard, agreed that the major ETF players will continue to dominate the market. Investors, he said, want established ETF brands.

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