The Future of Investing – Two ETF Brothers – B&V

Hello All! I am back! I had to take a significant break from writing. Had some life-changing activities to complete, which were very exciting but little related to investment. Thus, unfortunately for you, I will not be covering those here :).

I have decided to produce a series on the Future of Investing. The first topic will investigate two big passive investment players.  The subject is particularly interesting to me, in that it combines technology and investment.

I have not only passed Level III CFA but have also worked as a business analyst in the investment and banking industries. The impact of technology on the investment world has not only directly affected my work but shaped the world.

This topic will not investigate Alternative Investment, which I plan to do in the future due to the specific expertise it requires and the complexity of the topic. So, I will cover Alternative Investment as a future topic. Having said all of this, let’s start!

Equity and bond asset management is going passive. There are two big players providing a passive investment service, BlackRock and Vanguard (the ‘B&V’ of the title). There are multiple reasons why these two are at the top, but the most obvious one is that they have just been better than other providers at managing their costs with the help of technology. Quite simply they can provide ETFs and other passive funds with lower fees.

What is a passive investment? In short, it is an investment that does not require a manager to actively adjust weights in a portfolio to achieve superior results. Index tracking funds are just that. The aim is to match market performance.  Providers of index-tracking funds do not have complicated strategies and fees can be lower.

What do the numbers show? Around 37% of assets in the US equity are managed passively, which has increased from 19% in 2009. The two big passive players handle a big chunk of the market. The value of shares under B&V management is expected to reach over $20 trillion by 2025. The equity will come mostly from the US but also from the rest of the world.

This makes them (B&V) the world’s most significant money managers. Multiple governments, pension funds and hedge funds are part of their clientele.

Current assets under management:

Black Rock – $6 Trillion

Vanguard Group – $4.7 Trillion

State Street – $2.7 Trillion

Fidelity – $2.4 Trillion

And the two big players are not planning to stop. Vanguard is planning to add $5.3 Trillion to its assets and make it $10 Trillion by 2025 and BlackRock will reach this mark sooner by 2023.

A large part of the assets under management will merely come from a natural global increase in overall passively managed holdings. Global ETFs, which B&V is part of, could reach $25 Trillion by 2025. Also, there is scope to expand globally, not just in the US, as currently only 15% of the world’s equity markets are passively managed.

The concentration of assets under management in these two large players brings with it a couple of important discussion points.

Market Efficiency:

As most of the stocks will be owned by the two firms, they may indirectly influence prices mechanisms in competing businesses. Thus, concentrated ownership could reduce competition. When an investment company’s ownership reaches 10% of the business, then it has a strong influence on decision making and becomes an active investor.

BlackRock is already among the biggest holders of Alphabet, Facebook and Wells Fargo & Co to name just three.

Corporate Governance:

When you have large portion of the business, you can also make good influence via voting rights. Both BlackRock and Vanguard are seeking to improve companies’ governance under management and have dedicated teams, who investigates improvements.

Time will tell how much of the investing world will go passive.  The performance of index tracking will need to be sufficient for individuals or fund managers not to start stock picking again.

It’s worth noting that there are some positive signs of an increasing rate of return for active managers. Nevertheless, 57% of large-cap stock pickers have underperformed the market in the US between June 2016 and June 2017. Increasing rate of return for active managers might be even caused by having many indexing funds, which distorts the market. The distortion could make it easier to outperform the market. ETF follow markets and go the same direction up or down. Thus, giving hedge funds opportunities.

One thing is clear: the two companies are enormous and represent a duopoly. Should we lose sleep over this? Probably not. They have achieved their market position simply because of efficiency and low fees, which is good news for the consumer. If they increased their prices their market position would be lost. Currently, you can sell and buy ETFs and funds like a bread in a shop; although that is not recommended as an investment approach.

So, thanks to technology and efficient strategies on the part of the very biggest players you are getting your investment options cheaper than they would be otherwise.

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