Over the year, vast amounts of energy have been spent by both sides debating the merits of active stock picking versus low-cost tracker funds. The big news is that both sides have won, although possibly not quite in the way that advocates had envisaged.
Since the start of the year, shares in BlackRock, the largest provider of exchange-traded funds by market share, have hugely outperformed the wider market, rising by 35% year to date, compared to 18% for the S&P 500. Shares of other companies that are important providers of ETFs, although they do other things as well, have also beaten the wider market. State Street is up by 25%, whilst Invesco, which has consolidated its position as the ETFs industry's number four player, have risen by 21%. Vanguard the last major player, is not publicly quoted.
So does this, somewhat ironically, mean that instead of investing in a low-cost tracker fund, you should instead buy shares in the increasingly consolidated industry that provides them? These companies' strong performance may be hinting that investors and analysts are in the middle of a process of radically reappraising what type of businesses these really are. Instead of being boring, low-growth fund managers, they increasingly may be valued as something closer to highly entrenched, high-margin toll roads on trillions of dollars of retirement savings that need to be invested in financial markets over the coming decades.
Daniel Loeb, the American hedge fund manager, put forward the argument earlier this year that BlackRock was a "misunderstood" franchise that was, to quote him, "being valued like a traditional asset manager, when in fact, these ETF players are actually oligopoly businesses with faster growth and much higher incremental margins than traditional asset management, and thus deserve higher P/E multiples over time."
The market is coming around to his way of thinking. BlackRock is today valued at 23 times next year's consensus earnings, up from closer to 17 times at the start of the year. So before you rush to invest money in an ETF, think twice. It may be more profitable, in fact, to buy an ETF manager instead.