Claims staked in land grab

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The universe of exchange-traded funds continues to expand at an extraordinary rate. As Deborah Fuhr, managing director at Morgan Stanley, says, 2006 was a breakthrough year for the industry.

Not only did worldwide assets under management in ETFs jump 37.6 per cent to $573.9bn but the number of providers and products bloomed around the world. The pace of expansion shows little sign of slowing this year. With worldwide ETF assets forecast by Financial Research Corporation, a US data company, to reach $1,000bn by the end of 2010, there is something of an investment industry land grab going on.

Providers are rushing to stake a claim to product and geographic territory – to gain first-mover advantage in introducing innovative ETFs or stake out geographic territory from Budapest to Mumbai.

Ms Fuhr estimates the number of ETFs jumped 61 per cent to 732, while the number of managers rose from 50 to 64. The number of listings of ETFs nearly doubled from 601 to 1,055.

No firm, however, came close to matching Barclays Global Investors, the undisputed dominant force in the industry, in taking advantage of these trends. With its iShares brand of ETFs, it continued to strengthen its competitive position.

In spite of new entrants, the heavyweight lifted its global market share last year from 46.82 per cent to 49.6 per cent by the end of December, according to Morgan Stanley. Its assets under management in ETFs jumped from $195.17bn to $284.83bn over 2006. This is nearly three times as high as nearest competitor State Street Global Advisors, with $100.01bn invested in its ETFs.

BGI also set a blistering pace in product launches, bringing 39 ETFs to market. That increased its portfolio to 188 ETFs. Its range will expand with the $240m acquisition announced last November of rival Indexchange, the German ETF pioneer that was owned by the bank HVB.

The acquisition will bring on board 79 ETFs with $21.46bn of assets, 3.01 per cent of worldwide industry assets under management. These will be merged with iShares, making its European presence even more formidable.

SSGA, which pioneered ETFs in 1993 with the S&P 500-tracking SPDR, had a more mixed year. Assets under management in ETFs increased from $92.5bn to $101.1bn but that was not enough to prevent it losing market share. Morgan Stanley estimates its market share dropped from 22.19 per cent to 17.6 per cent. However, Ms Fuhr says State Street will be one to watch in 2007.

The other feature of 2006 was the growth of smaller providers staking a claim with new products highlighting areas ranging from commodities to indices of companies selected on the basis of fundamental factors such as dividend pay-outs or cash flows.

PowerShares, which was bought last year by mutual fund group Amvescap, set a strong pace, attracting attention for its innovative fundamental ETFs and others based on indices of stocks selected on quantitative factors. The Illinois-based company launched 33 ETFs, lifting its total portfolio to 69. Assets under management rose from $3.3bn to $8.47bn and its market share from 0.79 per cent to 1.5 per cent, according to Morgan Stanley

Another newcomer to gain plaudits for product innovation was Claymore Investments. Its 14 products included ETFs based on indices compiled to exploit factors such as corporate insider buying trends and Wall Street analyst upgrades. It also launched an ETF based on companies that have been spun off from larger groups, another based on companies with strong patents.

However, in the ETF land grab, there is one curious anomaly, a company that stands out more for its absence than its presence – the industry giant Fidelity. At the end of last year, it had one ETF – a product that tracks the Nasdaq Composite, with $130m of assets under management.

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