Larger rivals have forced others to develop niche products tied to everything from steel to India to pharmaceuticals
A decade ago, exchange-traded-fund company PowerShares was a tiny entrant in a field dominated by two giants.
Today it is No. 4 in the industry and swatting at a swarm of some 40 smaller competitors.
Now called Invesco PowerShares Capital Management LLC because of its 2006 acquisition by Invesco Ltd., it is housed in a former Wheaton, Ill., bed and breakfast that is bursting at the seams. Midyear, it will move 65 employees and $67 billion in assets under management to a Downers Grove, Ill., building, where there is room for expansion alongside other Invesco units.
PowerShares grew as investors poured money into ETFs.
State Street Global Advisors, which created the first ETF in 1993, ranks No. 2, behind industry leader iShares, another pioneer, now owned by BlackRock Inc., which had $587 billion in assets under management as of Jan. 31. The Vanguard Group Inc. is the No. 3 player, and it and its larger rivals have cornered the market on ETFs linked to big indexes such as the S&P 500.
That has forced PowerShares and others to develop niche products tied to everything from steel to India to pharmaceuticals.
“Outside the top three, there are only a handful that have done well innovating around the edges of the market, and PowerShares is one of them,” said Ben Johnson, Morningstar Inc.'s director of global passive-funds research.
The use of ETFs has been expanding at a much faster rate than mutual funds. U.S. investors had socked $142 trillion into ETFs as of Jan. 31, up from $156.5 billion on that date in 2004.
“Retail investors have been gradually adopting ETFs because it's a very simple and low-cost way to invest, especially now” that major retail investment companies such as The Charles Schwab Corp. make them available, said Erik Olson, a registered investment adviser at Arete Wealth Management LLC.
ACCESS TO CUSTOMERS
PowerShares lags the top three by a wide margin, but its growth prospects improved when Invesco gave it access to a broader base of clients. Although PowerShares has three foreign outposts, Invesco, which has $713 billion under management, is in 20 countries.
“Barriers to entry are fairly low in the ETF market, but barriers to success are fairly high,” Mr. Johnson said.
Invesco's profit fell slightly last year, compared with 2011, partly because the value of PowerShares' Nasdaq-linked funds declined with Apple Inc. (AAPL) shares.
ETF competition may be less important than attracting investors away from other investment vehicles such as mutual funds. To that end, PowerShares teamed with State Street to market its more specialized funds, such as an emerging-markets sovereign-debt fund.
“We really don't compete, because we don't bring products exactly like theirs,” said Ben Fulton, who leads the PowerShares unit. “We bring a complementary product.”
Mr. Fulton became head of the unit when PowerShares founder Bruce Bond retired in 2009. They worked together in the early 2000s at Nuveen Investments, but Nuveen showed little interest in ETFs, so they left.
While Mr. Bond launched PowerShares in 2003, Mr. Fulton co-founded Claymore Securities Inc., another ETF provider that was later acquired by BlackRock and Guggenheim Partners.
PowerShares, which has about 140 ETFs, this month added two more to its low-volatility-index suite, which has accumulated $3 billion in assets in less than two years. The company's product line holds another $11 billion in assets if commodities ETFs managed by Deutsche Bank AG but branded and sold under the PowerShares name are included.
COMPETITION BUILDING
Still, that German partner of seven years is increasingly a competitor, recently beginning to market rival ETFs in the United States and creeping up the ranks behind PowerShares.
Several other Chicago-area companies are also in the competitive mix, with Guggenheim ranking No. 8, First Trust taking No. 12 and Northern Trust Corp. and its FlexShares family of 10 funds jumping to No. 18 after entering the market just two years ago.
For PowerShares, expansion opportunities are increasingly abroad, Mr. Fulton said.
“We're looking to expand in Asia,” he said. “We're definitely not afraid of it, but it's not something we have to have to continue to grow.”
Lynne Marek is a senior reporter with sister publication Crain's Chicago Business.
