BlackRock’s Iron Grip on Europe Bond ETFs Defies Competition

  • IShares dominates fixed-income ETFs in Europe with 67% share
  • Deutsche Bank and Vanguard among rivals seeking a bigger slice

Competitors to BlackRock Inc. are trying to loosen the investing giant’s stranglehold on Europe’s $153 billion bond exchange-traded fund market. They’re struggling to make much headway.

The company’s market share has increased in recent years to 67 percent, data from Morningstar Inc. show, even as competitors add new funds and offer low fees. Rivals are being stymied because BlackRock’s iShares can offer investors access to European bond funds holding 93 billion euros ($101 billion) of net assets, or more than nine times the tally at nearest rival Deutsche Bank AG.

“There is a huge first-mover advantage,” said Deborah Fuhr, managing partner at research company ETFGI. “It’s difficult to launch successful ‘me–too’ products because you’re directly competing with a fund that already has assets and trading volume.”

Investors have poured about $9 billion into bond ETFs in Europe, the Middle East and Africa this year, according to BlackRock data, partly because they are becoming more accepted as an easier trading option than illiquid bond markets. New European Union rules coming into force in January may also boost the products’ popularity by making trading volumes more readily available.

“There’s quite a bit of investment going into bond ETFs,” said Blanca Koenig, a senior product strategist at Deutsche Bank’s X-trackers. “It’s certainly an area we want to grow.”

X-trackers is seeking to expand its 7 percent market share partly by converting many of its funds so that they own bonds rather than using swaps to follow an index. That mirrors what BlackRock does. So-called physical ETFs have been more popular with investors in recent years, said Koenig, who joined X-trackers from BlackRock in 2015.

Low Fees

Some providers are trying to lure investors by offering low fees. For instance, BlackRock charges 0.2 percent for investing in its iShares Core U.K. Gilts fund. State Street Corp.’s SPDR has a 0.15 percent levy for a similar ETF, while Vanguard Group’s fees are 0.12 percent. Lyxor Asset Management is even cheaper at 0.07 percent.

Still, investors may accept higher fees to invest in large ETFs because these products are generally easier to trade. The iShares gilt fund has 1.8 billion euros of assets, at least 10 times more than the State Street, Vanguard and Lyxor funds.

Vanguard, which ranks second to iShares in the U.S. bond ETF market, has increased its presence in Europe over the last year, including introducing five new debt funds. It’s also added more staff to help boost its 0.3 percent regional market share.

“There isn’t a lot of competition in fixed-income ETFs and that’s bad for investors,” said Andreas Zingg, Vanguard’s head of Europe ETF Distribution, and an ex-iShares employee. “There is a lot of energy and work from us and also from competitors to make this area of the market more competitive.”

iShares Purchase

BlackRock dominates bond ETFs in Europe -- and has about half the U.S. market -- largely because of its 2009 acquisition of Barclays Global Investors, the owner of iShares. The New York-based company offers more than 80 fixed-income ETFs in Europe, including products tied to emerging markets, corporate debt and mortgage-backed securities.

“Increased competition will help grow the market and lead to greater innovation and education, which we welcome as being good for investors,” Brett Olson, BlackRock’s head of EMEA fixed-income iShares, said by email.

The European bond ETF market has room to grow because it’s only about a third of the size of the U.S. This is partly due to the region’s varying tax regimes, which make it difficult for providers to operate funds across national borders.

ETF Demand

Demand has also been curbed by a dearth of trading data. This will probably end in January because investors will have to report trades under the Markets in Financial Instruments Directive II, or MiFID II. The change will spur trading via exchanges rather than over the counter, said Jose Garcia-Zarate, Morningstar’s associate director in passive research.

Pimco, which has 20 ETF offerings globally, is considering adding funds focused on high-yield notes or securitized debt, said Ryan Blute, the head of its global wealth management business in Europe, the Middle East and Africa. The company also has actively managed ETFs in contrast to BlackRock’s purely index-tracking funds in Europe.

State Street has “invested heavily” in its European ETF sales team over the past year, said Jo McCaffrey, head of international product for SPDR ETFs, and another iShares alumnus. The company boosted its fixed-income ETF market share to 4.6 percent in March from 3.6 percent a year earlier, according to Morningstar. Invesco Ltd. is also targeting the European ETF market with an agreement to buy fund operator Source last week.

“If you talk to any ETF provider in Europe, fixed income is at the top of their priorities,” said Morningstar’s Garcia-Zarate. “BlackRock has a very tight grip and the other providers want a piece of the market.”

(A previous version of this story corrected the number of BlackRock bond ETFs in Europe in the 11th paragraph.)

— With assistance by Rachel Evans

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