ETFs’ siren song still lures managers

As a new crop of money managers and investment banks enters the hot market of exchange-traded funds, the challenge already has proved too much for some in a sector where scale is key.

Already, a few carcasses have been left along the way as firms such as Northern Trust Corp., Axa Investment Managers and London & Capital PLC have withdrawn in the past year after unsuccessful attempts to kick-start ETF businesses.

Still, ETFs are luring heavyweight managers, including Goldman Sachs Asset Management, Pacific Investment Management Co. LLC, Russell Investments and T. Rowe Price Group Inc.

“There’s no doubt growing an ETF business right now is very challenging,” said Ted Hood, chief executive of Source, which was launched last summer in Europe to offer ETFs to a largely institutional market. “It’s not an immature market, and there are well-established incumbent firms that are good at what they’ve done to date.”

Global ETF assets surpassed the $1 trillion mark at the end of last year, up a whopping 45.7% from a year earlier, according to an annual ETF industry review published this month by BlackRock Inc.’s ETF research and implementation strategy team in London. In 2010, ETF assets are predicted to increase by 20% to 30%, according to the report.

A number of big firms have jumped on the ETF bandwagon or plan to do so.

Pimco gained about $418 million in asset inflows as of Dec. 31 within months of launching a series of fixed-income ETFs, including actively managed strategies, in the U.S.

Jefferies Asset Management LLC, a division of Jefferies & Co. Inc., introduced several ETFs that invest in commodities-related companies. The firm has about $100 million in ETF assets under management.

T. Rowe Price in 2009 filed with the Securities and Exchange Commission to offer active fixed-income and equity ETFs in the United States. The application is still pending.

The Goldman Sachs Group Inc. and its asset management subsidiary, GSAM, also have applied to the SEC to manage equity, fixed-income and blended ETFs in the U.S. That application also is still pending.

London hedge fund manager Marshall Wace LLP is introducing an ETF that tracks an index based on the firm’s market-neutral investment strategy.

Russell hired away two top iShares executives — Andrew Arenberg and James Polisson — in January as managing directors to launch an ETF business. Russell spokesman Steve Claiborne declined to provide details but hinted that the firm will pursue active ETFs.

ETF Securities Ltd. in November launched ETF Exchange, a global platform backed by a consortium of banks that includes Bank of America Corp., Barclays Capital, Citigroup Inc. and Rabobank International. Separately, ETF Securities was launched in the United States in July and has gathered more than $1 billion in assets nationwide.

The Charles Schwab Corp. and John Hancock Funds LLC are among firms in wealth management that are taking the plunge into ETFs.

Of course, competing in the ETF industry requires not only the ability to introduce viable products but, more importantly, marketing and distribution capability.

Several ETF players have already thrown in the towel.

In January 2009, Northern Trust executives shocked analysts when it announced plans to shut down 17 ETFs less than a year after making a grand entrance into the business. At the time, the company had $33 million in ETF assets under management.

Later that year, London & Capital executives also decided to shut down the company’s SPA ETF series. Axa IM followed suit in May by transferring its stake in the EasyETF joint venture with BNP Paribas Asset Management SAS to its partner. At the time, Axa IM had 1.3 billion euros ($1.8 billion) in ETF assets under management in commodities, real estate, credit and infrastructure strategies.

“The fact that these firms have dropped out speaks to the fact that it’s not easy to compete in the ETF market,” said Loren Fox, senior research analyst at Strategic Insight Mutual Fund Research and Consulting LLC. “There are a lot of wheels to keep spinning, and it may not make sense for some firms to enter at all.”

Thao Hua is a reporter for sister publication Pensions & Investments.