Who are PennyMac's competitors

"ETFs replace bank balance sheets in bond trading"

Blackrock is the world's largest fund company and market leader in the exchange-traded funds business. The division head Mark Wiedman explains where he sees growth potential.

Mr Wiedman, iShares, Blackrock's ETF subsidiary, bought the Exchange-Traded Funds (ETF) division from Credit Suisse a year and a half ago. What does iShares want in the Swiss market?

The aim of the acquisition was to expand our ETF range with products that invest in Swiss stocks and bonds as well as in gold. We have established ourselves at the center of the portfolios of Swiss investors. We have integrated the remaining CS ETFs into existing iShares products - quite a challenge. The Swiss market is highly competitive. Our competitors have welcomed us with price reductions. But we are growing at an attractive rate and have a team of 20 people on site. The market is also central to us because of the institutional Swiss investors and the funds they manage for foreign clients.

How do you assess the fee battle that is going on in various markets?

Not all fees go down. Customers who buy ETFs as core investments for their portfolios and want to hold them for a long time are rightly price-sensitive. As with all fund investments, the recurring fees put pressure on returns. For this market segment, we launched the very affordable iShares Core series last June. But there are also many customers - we estimate more than half - for whom other aspects are just as important or more important. This includes the quality of portfolio management - in other words, as little deviation from the index as possible - access to a special market segment, such as shares in small Brazilian companies, or liquidity. For such customers, some competitors are even designing new special products with significantly higher fees.

Nevertheless: What was the reason for the extreme drop in fees in Europe in the current year?

In the case of core ETFs, the fees in Europe have recently dropped from above-average values ​​directly to the minimum. So the price war is over before it even begins. We knew from the USA where the minimum was and wanted to save ourselves the struggle for wear and tear. We also want to sell our ETFs that invest in Europe worldwide. Significantly higher fees would have made this more difficult. Core ETFs for US equities are available at a total expense ratio of 7 basis points, those on the Euro-Stoxx 50 for 10. For ETFs on equities from emerging markets, we require 25 basis points.

As a representative of the largest ETF provider, how do you assess the competition?

It consists not only of ETF providers, but also of other financial instruments and investment products. Blackrock is the only global provider. Vanguard, State Street and Blackrock are vying for the US market. In Europe, the big companies Blackrock, Deutsche Bank and Société Générale with the Lyxor brand are, but there are around 40 providers in total. This also includes State Street, Vanguard and UBS. In the US, $ 1900 billion is invested in ETFs, much more than the roughly $ 450 billion in Europe. In itself, however, only a few providers per market can handle it, because in order to earn money with such low fees, you have to manage very large assets.

How much?

As a rule of thumb, an ETF provider will break even with around $ 20 billion in assets under management. Entry into the market is very difficult for newcomers where the industry has already consolidated itself to three to six providers. In five years there will certainly be fewer providers in Europe than there are today. Quite a few now manage less than $ 6 billion.

Will some of them sell their ETF business?

In case they find buyers. For legal reasons, integration is very complex and expensive. Until now, no provider wants to lose face. In the future, good pan-European sales channels will be a “must”. Deutsche Bank and Lyxor already have it and manage around $ 50 billion each.

UBS has a strong in-house sales channel.

Which is your big advantage. However, today a bank can no longer sell any number of its own products to its customers. You have to decide for yourself whether this limited space in the customer portfolio is ideally used with your own low-fee ETF.

What are your growth forecasts?

In January 2009, the industry was managing nearly $ 700 billion worldwide. It is currently around 2.6 trillion. $, of which just under 1 trillion. $ managed by us. 30% of the increase is due to market developments, 70% comes from new money. We expect 11% growth in new money per year until the end of 2017.

How much money does conventional investment funds come from, which Blackrock also manages and sells on a large scale?

We do not know that. But we think there is less money being shifted from conventional funds than many people think.


The reasons investors buy ETFs have changed since the 2007-08 financial crisis. ETFs generally take a bundle of securities and issue shares on them that are traded on the stock exchange. Conventional investment funds do that too, but with ETFs, third-party players can arbitrage on the stock exchange if the value of the underlying securities deviates too much from the price of the ETF share. This ensures that the prices of the underlying securities never deviate too much from the ETF price. An ETF has a transparent price and can create secondary liquidity. This is an important factor, especially for bonds, whose markets are becoming increasingly illiquid.

What do you mean by that?

Bonds are mostly traded as individual securities between banks and investors, only rarely on stock exchanges. There is no price transparency. In an ETF, a bundle of bonds goes public and receives a transparent price. The secondary liquidity arises when a bank no longer acts as a temporary buyer with its balance sheet, as is usually the case with trading illiquid securities. An ETF enables buyers and sellers to get in direct contact with one another - simply not for individual stocks, but for the bundle. Institutional investors no longer need to fear illiquidity, and trading is cheaper. 90% of ETF business in Europe comes from institutional investors.

Isn't that a risk? The ETF itself cannot issue or buy back any additional shares if the underlying securities are temporarily not tradable.

This is not a problem. Of course, the ETF is affected by such a situation, but investors usually get away better than with normal investment funds or individual securities. If investors withdraw money from a normal investment fund, they may be forced to throw the underlying securities on the market - regardless of the price and the paper, the main thing is to find a buyer. A bank usually has to purchase bonds for cash. An ETF, on the other hand, is usually not directly forced to sell underlying securities, because investors can first sell the ETF shares to other investors on the stock exchange. If the ETF is confronted with so many sales that the price of the ETF shares and the value of the underlying securities drift far apart, it does not sell bonds for cash, but takes back its own shares and gives the securities to a counterparty. We therefore believe that ETFs reduce systemic risk. The bank balance sheets, which are also used for loans to the real economy, are left out of the picture.

So are bonds the most important growth area for ETFs?

The potential is great. Around 3% of all stocks worldwide are currently traded via ETFs, but only 0.4% of bonds. Bond ETFs have been around for even less, and they have a cultural problem: They are equity-like securities. Bond specialists struggle with this idea. We see a market potential for bond ETFs of $ 300 billion in the next two to three years. We just have to learn to communicate with bond specialists.

Does the regulator allow institutional investors to make these investments?

Solvency II at insurers and the accounting regulations of IFRS treat bond ETFs in a “look through” procedure: The underlying securities and not the form of the ETF are decisive for the booking. The barrier is not regulatory, but psychological.

Where else is growth coming from?

Normal investment funds currently total an estimated 20 trillion worldwide. $ 48 trillion in derivatives $, and stocks and bonds 164 trillion. $ - ETF only 2.6 trillion. $. ETFs can partially replace all of these asset classes. The segment of small private customers is still tiny everywhere except North America. Institutional investors around the world have only recently discovered ETFs and are not investing much in them yet.

What do you think of Smart Beta or Active ETF?

Originally, ETFs were cheap and transparent index investments. Actively investing ETFs are a solution that is still looking for its problem. They collect around $ 8 billion globally and do not get anywhere. This is because the benefits of ETFs are irrelevant to active investments. No active fund manager wants to keep their investments open, and active ETFs are expensive. However, you have to distinguish between those ETFs that invest in something that does not have an index. Personally, I could well imagine cash ETFs as a substitute for money market investments. We don't like the term “smart beta” very much, but it makes perfect sense to offer ETFs that invest according to fixed rules but are not based on market capitalizations, as common market indices do.

What are you thinking of specifically?

In the case of bonds, for example, capitalization-weighted market indices are actually nonsense. In the stock market, one can argue that large cap companies are good. But debtors with many outstanding bonds are often ailing. One cannot simply apply a concept from the world of stocks to bonds. But even with stocks, the active managers take advantage of liquidity or quality risks that could be mapped in ETFs. But I would be careful with Smart Beta ETFs, which promise a better return than the market and also charge fees of 70 to 80 basis points. An expensive Smart Beta ETF, which only weights all stocks in one market equally, can be replaced by a combination of a cheap, common ETF with an equally cheap ETF on a small cap index.

When are conventional investment funds better than ETFs?

They are good for active management: when a fund manager can actually track down undervalued stocks, get investors to believe in him, and keep him going even in bad times. But also for mixtures of different asset classes, i.e. mixed or strategy funds. You can't do that with ETFs. If small sums are regularly paid in - for example when saving for retirement savings - ETFs are also suboptimal because trading fees are incurred with every investment.

The head of the ETF division iShares at Blackrock, Mark Wiedman, is a member of the executive board of the world's largest asset management company. He is also a director of PennyMac Financial Services, an American mortgage broker and asset manager, which Blackrock helped set up in 2008. Wiedman has worked for Blackrock in various functions for ten years. Most recently, he was responsible for the Group's global strategy. Prior to joining Blackrock, he was Senior Advisor and Chief of Staff of the Undersecretary for Domestic Finance in the US Treasury Department and advisor to financial firms at McKinsey. He has also taught at Fordham University in New York and Renmin University in Beijing. Wiedman graduated from Harvard University with an Honors degree in Social Studies in 1992 and a law degree from Yale in 1996. (gave.)