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ETF Selection Criteria – Tenure.

Last time we proposed ETF selection criteria to help the Individual Investor sort through the multitude of ETFs available to make simple, sensible choices for their portfolio. One criterion was …

Established ETF provider.

ETF Provider # ETFs $AUM Market Share
iShares 45 $29 Billion 70%
Claymore 31 $7 Billion 16%
BetaPro 68 $3 Billion 7%
Bank Montreal 40 $3 Billion 6%
ETF Provider # ETFs $AUM Market Share
iShares 474 $621 Billion 43%
State Street 137 $204 Billion 14%
Vanguard 69 $175 Billion 12%

The top three ETF providers, out of 146, account for 69.3% of global ETF $AUM, while the remaining 143 providers each have less than 4.0% market share. 12 new providers have entered the industry in 2011, launching their first ETFs, while 41 firms have indicated plans to launch their first ETF in the future”. Source: Blackrock iShares

Established ETF providers have the major asset classes, regions and sectors covered. Subsequent players will (by definition) provide niche ETFs that cover ever thinner slices of an already small and getting smaller ETF marketplace. (“12 new providers have entered the industry in 2011” – see above).  Do niche players have higher costs? Marketing, specialization and differentiation is expensive? And can mean complexity (at least less-simple). Usually, the more simple the ETF, the closer it will track its benchmark index. The more complex the ETF, the larger the tracking error is likely to be.

Stick to the ETF leaders. For Canadian content, it’s iShares and maybe one from Claymore and one from BMO. For non-Canadian content look at iSharesVanguard and State Street. (State Street ETFs have been around a while and are very liquid but always seem to lose out in the analysis due to either cost or not being diversified enough or an ETF might trade at a high price meaning an investor can buy 2x or 3x the units of a competitive ETF … important for rebalancing or taking profits).

The established ETF provider’s ETFs also have trading volume. Daily trading volume indicates liquidity. XIU is the most liquid ETF in Canada … by far. SPY on the U.S. side.

Next time?
ETF selection criteria more rationale.
Doug Cronk CFA is Manager, Investments for a Canadian Pension Plan

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