Any industry growing as quickly as the ETF space has been over the last few years is bound to experience a few growing pains. As it has transitioned from a closet industry to a component of the mainstream investment universe, the ETF market has become increasingly complex, leading to widespread confusion on more than a few issues. One such area open to varying interpretation is the reporting of month end ETF industry statistics. While the metric of most interest to the industry tends to be the overall fund inflows/outflows to ETFs for the month, I’m always interested to see which ETF managers have gained or lost market share, and how the composition of the industry totem pole has changed.
I wrote last month that in order to really understand what the numbers were telling us, I had dug a little deeper into the May statistical bulletin put out by SSgA. Apparently I didn’t dig deep enough. The more I got into it, the more inconsistencies I discovered in how manager assets are reported. Perhaps the most confusing aspect: the methodologies used to account for Bank of New York Mellon (BNY) ETFs. In SSgA’s May ETF Snapshot, BNY checks in as the 4th largest ETF manager, with six ETFs totaling $20.2 billion in assets. But according to ETF issuer data from the National Stock Exchange, BNY ETFs had only $6.4 billion of assets at the end of May. That’s a nearly $14 billion disconnect – not exactly a rounding error. Here’s the explanation:
The six funds included in BNY’s total by State Street total are (all asset amounts as of May 31):
- PowerShares QQQ (QQQQ): $13.4 billion
- PowerShares BLDRS Asia 50 ADR Index Fund (ADRA): $61 million
- PowerShares BLDRS Developed Markets ADR Index Fund (ADRD): $66 million
- PowerShares BLDRS Emerging Markets 50 ADR Index Fund (ADRE): $532 million
- PowerShares Europe 100 ADR Index Fund (ADRU): $18 million
- SPDR S&P MidCap 400 ETF (MDY): $6.4 billion
But only MDY is included as a BNY ETF in the NSX data (apologies for the acronym overload).
Confused? Here’s the explanation: While Invesco PowerShares and State Street act as the marketing agents for these funds, BNY serves as the trustee. In this capacity, BNY is responsible for adjusting the holdings of these ETFs to conform to periodic changes in the identity and weightings of the components of the underlying index. Invesco PowerShares and State Street market these funds under their respective “franchises,” so most investors would consider these ETFs to be members of the Invesco PowerShares and State Street fund families.
Still confused? To be honest, so am I. There’s still a few things I can’t figure out. For one, State Street doesn’t also include GLD, an ETF for which BNY serves as the Trustee, in BNY’s total. This seems inconsistent with the methodology it applies to the five PowerShares ETFs and to its own mid-cap fund. With assets of more than $30 billion, GLD could materially alter the reported market share percentages if reclassified. I’m also not exactly sure why NSX doesn’t lump MDY in with the other State Street funds, as it does for QQQQ and the four BLDRs.
PowerShares / DB Commodity Funds
It’s the same story for the line of PowerShares Commodity ETFs managed by Deutsche Bank. These funds are grouped separately in State Street’s summary, but included within a consolidated PowerShares line item in the NSX data. Again, Deutsche Bank manages these ETFs, but they are marketed and sponsored by PowerShares, and PowerShares considers them to be part of their ETF family. “Invesco PowerShares handles the marketing of the Deutsche Bank Commodity ETFs, though not the day-to-day management of the funds,” says Ed McRedmond, Senior Vice President of Portfolio Strategies at Invesco PowerShares.
The three largest players in the ETF space are essentially locked into their positions, with iShares leading the way followed by State Street and Vanguard. As reported by SSgA, ProShares (4.4% market share) was the 4th largest manager in May, followed by BNY (3.5%). PowerShares (1.8%) comes in at #6, while PowerShares/DB Commodity Services (1.2%) occupies the #8 spot.
But if we include the four BLDRs funds and QQQQ in the PowerShares total, the market share more than doubles to approximately 4.1%, leapfrogging BNY. If we include the DB commodity funds as part of the fund family, Invesco PowerShares’ market share is approximately 5.3%, making it the fourth largest issuer by a considerable margin.
To me, the total “franchise assets” approach (which has PowerShares as the industry’s fourth largest player and includes MDY with the rest of State Street’s funds) seems like the most logical and useful way to present market share data. Although the trustee of these funds is responsible for occasional rebalancing, ETF investing is, by its very definition, passive in nature. The fund sponsor (i.e., Invesco PowerShares) is still responsible for the creation, administration, distribution, and marketing of these ETFs. Moreover, according to the prospectus for most ETFs, the sponsor often has the ability to take major actions impacting funds, including termination of the fund or modification of the trust agreement.
But that doesn’t mean that any of the data sources out there are wrong. Both NSX and SSgA are publishing accurate statistics based on the same (or at least similar) data. And their “answers” are both correct, but they’re in response to slightly different questions. Although it may seem like a trivial matter, a lack of consistency in reporting inevitably leads to competing reports and investor confusion, something most everyone in the industry would like to avoid. “We would like to see some consistency to the ETF data that is being presented on a monthly basis,” says McRedmond.
It’s my hope that this insight into how monthly issuer statistics are actually being compiled and reported will stimulate some meaningful discussions that lead to some measure of consistency. I’m sure many of you have thoughts on this matter and how you’d like to see it resolved. I, for one, am all ears.
Disclosure: Long ADRE at the time of writing.