Australian ETF ‘underdog’ is taking on Vanguard and BlackRock

Three fund firms have emerged as leaders in Australia’s exchange traded fund industry, which has become one of the fastest growing in the world. Battling alongside two global ETF giants is a local “underdog” with a different origin story and challenges for ensuring longer-term growth.

Alex Vynokur, a Ukrainian national who had emigrated to Australia 15 years earlier, set up a new Sydney-based Betashares in 2009, sensing changing market trends and investor needs.

Today, Betashares and BlackRock’s iShares ETF businesses are virtually neck and neck in terms of Australian ETF assets and are vying to catch market leader Vanguard. The three firms have secured a dominant position in the fast growing market.

Australia’s ETF assets have doubled in size over the past three years, surpassing A$150bn ($95.69bn) by the end of July. The three largest ETF providers now own a 66.7 per cent market share and have collectively garnered for more than 90 per cent of ETF flows so far this year.

This article was previously published by Ignites Asia, a title owned by the FT Group.

Australia’s ETF industry growth is partly thanks to the country’s Future of Financial Advice legislation in 2013. The reforms effectively abolished generous commission structures for financial advisers and made lower-cost ETFs more attractive products to recommend to investors.

Vynokur admits he got lucky with the timing.

“Of course, nobody has a crystal ball, and nobody really picks these things perfectly,” said Vynokur. “A great idea that’s five years too early is a failure, and a great idea that’s five years too late is also going to be a failure,” he added.

Betashares now has the largest range of ETFs in the country encompassing 83 different core and specialist vehicles with combined assets surpassing A$30bn in August. The firm attracted the largest net flows of A$1.8bn in the first half of the year, ahead of Vanguard and BlackRock’s iShares.

Competing against the advantages of huge global ETF behemoths, Vynokur believes Betashares has benefited from being a homegrown Aussie name in the retail investor-driven ETF market. However, establishing its name as an unknown start-up in the market was tough going.

“In Australia, people love to back an underdog or love to back a local player,” said Vynokur.

“But when it comes to money, they might give you a little bit, but they certainly won’t trust you with a significant portion of their wealth until you’ve really proven yourself.”

While the global headquarters of some ETF players may direct corporate or product strategies from one region to another, Vynokur believes Betashares can benefit from being a private, employee-owned local firm that can enact business decisions directly from its Sydney boardroom.

This advantage, Vynokur argues, has at times come to the fore amid Australia’s ETF escalating fee war.

When BlackRock in February moved to undercut the BetaShares Australia 200 ETF by slashing the annual management fee for its A$4.4bn BlackRock iShares Core S&P/ASX 200 ETF from 0.09 per cent to 0.05 per cent, Vynokur and his board were able to react quickly.

Within 36 hours, BetaShares was able to implement the decision to hit back, cutting the fees on its Australia 200 ETF below BlackRock, down to just 0.04 per cent.

But BlackRock has continued to slash fees on other products this year, including the iShares Core FTSE Global Infrastructure and iShares Core FTSE Global Property ex Australia ETFs, and launching the lowest-cost US Treasuries ETF in Australia last month.

Vanguard has also joined the price war, reducing fees in June on its A$12.9bn Vanguard Australian Shares Index ETF, Australia’s largest ETF, from 0.1 per cent to 0.07 per cent.

Betashares’ Vynokur said ETFs in Australia were not just competing against each other in the “vanilla” strategy space, where every basis point counts, but a very large portion of the industry is competing with actively managed funds.

“Statistics around performance of active managers is still no different to what it was 12-odd years ago, when we were just starting the business. It is still the fact that the vast majority of them underperform,” he added.

“For me, it is not about bragging rights of having the number one market share or the number two market share,” he said. “What’s really critical is that we put all of our effort into growing the pie.”

While analysts suggest Betashares has got its ETF-focused strategy right over the past decade, maintaining growth in a more competitive market and finding ways to diversify and expand the business may prove to be even harder than growing a start-up ETF business to take on BlackRock and Vanguard.

Justin Walsh, Sydney-based associate director for manager research at Morningstar, said Betashares had benefited from close relationships with the broker community to compete with the likes of BlackRock and Vanguard across all product strategies.

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“To date, they’ve proved that the strategy they’ve pursued has been successful,” he said. “But if they’re going to continue, I expect the next 10 years to be a lot more competitive than the last 10 years have been.”

There may also be questions for the company to answer about whether the firm can continue to run so many ETFs, many of which are niche “esoteric” ETF strategies with low asset levels.

Betashares is making steps to diversify its Australia-focused ETF business, looking ahead to the next 10 years.

In May, it announced it would launch ETFs domiciled in New Zealand, the first outside its home market. Last month, it revealed it was preparing to enter the country’s A$3.5tn superannuation pensions market, following the footsteps of Vanguard, which made its debut at the end of last year.

*Ignites Asia is a news service published by FT Specialist for professionals working in the asset management industry. Trials and subscriptions are available at ignitesasia.com.