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[This article appears in our February 2019 issue of ETF Report.]
Almost anyone can launch an exchange-traded fund these days.
But launching funds and developing a business to compete effectively with the giants of the ETF world is something else.
Through its organic growth and strategic acquisitions, Invesco has been catapulted into the fourth most comfortable position in the US ETF sector, with total badets under management of more than $ 167 billion. Vanguard, BlackRock and State Street Global Advisors are still a long way off, but also ahead of fifth-ranked ETF provider Charles Schwab. Globally, the company manages badets of approximately $ 926 billion, of which $ 233 billion is invested in its ETFs.
Dan Draper, chief executive and global head of ETFs for Invesco, said that when he joined the company in September 2013, he experienced strong organic growth, but if Invesco wanted to compete as a leading ETF had to move up a gear through mergers and acquisitions. .
Acquisition of other issuers
Invesco acquired the business of PowerShares ETFs in 2006. The first purchase of this issuer after this transaction took place more than three years ago, when it took over the core business of Deutsche Bank. Then, in 2017, Invesco bought Source, the European ETF specialist.
In early 2018, Invesco bought Guggenheim, which gave it access to the popular fixed-income BulletShares ETFs. In October 2018, Invesco announced the conclusion of a purchase agreement from OppenheimerFunds, known for its income-weighted smart beta funds. If this agreement is concluded, it will bring the total badets under management of Invesco for its various products and activities to $ 1.2 trillion.
Each transaction was strategic: the purchase by Deutsche Bank gave Invesco access to an alternative badet; the acquisition of Source was for geographic growth; and the Guggenheim and now Oppenheimer deals were focused on products and content, notes Draper.
Invesco's ETF business may continue to grow as it becomes an important part of Invesco's large investment management company, Draper said, citing public projects by Invesco CEO Martin Flanagan. Flanagan highlighted seven key growth drivers for the US, European and Asian businesses in early 2018, particularly the ETF division, said Draper, noting that Invesco's chief executive officer also wanted to strengthen the institutional presence of the company, focus on customer solutions and strengthen its robo consulting service. , among other objectives.
"What's interesting is that ETFs are not just one of the seven [focus areas]but it is also described in the other six [as having] a role to play, "said Draper.
Draper called the ETF sector within Invesco's largest company "a bit like a microprocessor chip, helping the processing power within the badet allocation and all the models developed by our team of solutions ".
This integration into big business will help the ETF side continue to compete with the big three, he added, expanding its reach and expanding the scope of its content.
Smart Bet?
Invesco is also betting on smart / beta / factorial investing. The Guggenheim and Oppenheimer agreements have added a greater depth of products in this regard. According to Draper, the S & P 500 Equal Weight ETF (RSP) and the other equal-weighting sector ETFs that Guggenheim brought to the table have helped to supplement their equity offering.
"It was a very interesting technology for us … If you think about our leading position in smart beta, probably one of the most efficient technologies, but also the simplest, smart-beta [approaches] is of equal weight, "he said.
Invesco wants to be recognized as a leader in factor investing. Beta-smart products have been new for some ETF issuers, but not for Invesco, says Jason Stoneberg, director of ETF research at the company.
"This is part of our DNA and our roots," he said, noting that the original PowerShares range, founded in 2003, was a type of multifactorial quantitative index designed to differentiate them from the exhibition. traditional market capitalization weighted.
According to Draper, Invesco's interest in innovation, particularly in the beta-factor ETF sector, is one of the ways in which it wants to differentiate itself from Vanguard's offerings. , BlackRock and State Street, weighted by market capitalization.
Invesco says it has 261 smart beta products in all of its global operations. Stoneberg stresses that the company stands out for the depth, breadth and track record of its product lines. The company spends more time helping its customers implement smart beta.
"Because we have been in the market for so long with these products … we understand how to use these products, we understand the different exposures that [clients’] portfolios and how these smart, factor-based beta products can adapt to achieve different results, "said Stoneberg. "Because of the product line, we felt we could focus on the higher level partnership with our customers to use them."
Smart beta is only a small part of the big ETF industry, but this space is growing rapidly. He pointed out that at the end of November, the smart bet segment of the US ETF market was $ 4 billion, or about 12% of the total badets under management of the ETFs, but they accounted for 15% of total inflows. of funds so far. The fact that its growth is superior to that of the overall market is one of the reasons why it is at the center of Invesco's concerns.
Stoneberg believes that accelerating market volatility may lead to increased interest in certain factor ETFs, such as the popular Invesco S & P 500 Low Volatility ETF (SPLV), which was unchanged from S & P 500 as a whole. 8.7%.
"I think in different market environments like this, where customers and investors can see how these things work, is very powerful," he said. "I think that's what will fuel increased adoption."
Invesco also ventures into the fixed income segment with its factor products, building on its standard fixed income ETF offering. In July, the company launched a series of eight factor bond ETFs, which, according to Invesco, was at the time a partnership between the company's fixed income team and a new indexing division. The funds are based on a rules-based and research-based methodology of Invesco's active fund business.
Look to the front
While Draper does not rule out further acquisitions, he adds that his goal now is to complete the Oppenheimer operation, client solutions and ETF integration within the Invesco group. "As we become more relevant at Invesco, ETFs will find more and more ways to help deliver solutions to the models that our larger colleagues are focusing on," he said.
By focusing on smart investment / beta / factor products and customer solutions, it could help Invesco avoid some of the worst cuts – even if Invesco did not escape, including reducing costs on BulletShares products. Draper wants to articulate the discussion about fees around the total experience: transaction costs, liquidity, tracking indices. "What really matters is the net returns," he said.
The growth of Invesco ETFs looks dramatic, but has not always been consistent. One of the challenges for a few years has been to try to develop outside of North America. According to Draper, fragmentation in Europe – where activities were more institutional – and further fragmentation in Asia have made it difficult for even a well-established brand, such as PowerShares, to growth similar to that observed in the United States. business led the case Source.
"If you go international, you can not install a flag and recruit a few products. It's a real balance between getting the right products, "he said. "They have to be outside of the United States, and it's a trade-off between getting the products and distributing them, because if you build your distribution without having scaled the product, you do not have to do it. you really have nothing to sell. "
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