An ambitious European ETF firm backed by former iShares leader Lee Kranefuss charged into the U.S. Tuesday, launching its first fund and throwing down the gantlet to a “stale” industry.
The firm, Source, is the seventh largest in Europe's smaller ETF industry and 23rd globally. As it enters the United States, Source will be competing for assets with an increasingly entrenched group of three providers — iShares (owned by BlackRock Inc.), the Vanguard Group Inc. and State Street Corp. — and dozens of smaller players.
While at iShares before it was acquired by BlackRock in 2009, Mr. Kranefuss, Source's executive chairman, led the firm's efforts to popularize the concept of cheaply trading entire markets over exchanges much like a stock, the core concept of the original exchange-traded funds. The industry managed tens of billions in the early 2000s; today, it's a $2.7 trillion business.
Mr. Kranefuss, who built iShares into a $300 billion business between 2000 and 2009, today calls the industry “rather stale,” arguing a newcomer needs to shake things up.
“You have Chevy, Ford and Chrysler,” he said. “There's plenty of room for upping the game and taking the business to the next generation.”
Existing firms build commodities or look for hot, one-off products. But few are leading innovators, he said. Investors are looking for better diversification, and the markets have yet to deliver it, according to Mr. Kranefuss.
Industry watchers say Mr. Kranefuss' imprimatur is a coup for Source.
“He's one of the pillars of the industry,” said Dave Nadig, chief investment officer at ETF.com, a research firm. “He's certainly one of the smartest marketing minds about how to get these things running and into the right hands. He's not a horse I would bet against.”
He said the fund company's first product is “straightforward” because the firm needs to establish its sales efforts and relationships before facing the challenge of explaining complicated products to the market and investors. He said he expects the firm to develop more exotic funds eventually.
Mr. Kranefuss advises private-equity firm Warburg Pincus, a Source backer, on the asset management business. He said he's also personally invested in Source.
Source is willing to partner with competitors, develop product ideas from advisers and consider exotic ideas, according to Peter Thompson, president of Source's exchange-traded investments division.
The new fund, the Source EURO STOXX 50 ETF (ESTX), tracks top companies in a widely used European benchmark for a cost of 0.16% of assets annually. That gives investors access to major global powerhouses, including Belgian beer-brewer Anheuser-Busch InBev, Finnish technology giant Nokia Oyj and the French cosmetics firm L'Oréal Group. The fund is managed on a day-to-day basis, or “sub-advised,” by Mellon Capital Management Corp.
The launch comes at something of an awkward moment. While those European companies sell products worldwide, their home markets are struggling to post consistent economic growth. A new
estimate Tuesday based on survey data by Markit Group Ltd., suggests the region will grow by a paltry 0.3% in the third quarter.
The SPDR Euro Stoxx 50 ETF (FEZ), a State Street product tracking the same index, has returned 9.12% over the last year, 19.8% over three and 3.12% over five. The S&P 500, the U.S. broad stock market benchmark, is up 19% over the last year. FEZ charges 29 basis points, or 0.29%.
Despite the outperformance of U.S. stocks, many advisers recommend a long-term, diversified allocation to international equities.
