ETF Firm Acquisitions: The Three Firms Most Likely to be Targeted

In 2014 and 2015 there was a wave of ETF company acquisitions by large asset management firms. The reason was simple: if an asset management company was not in the ETF game, they realized they really needed to get in it. ETFs were not a fad that was going away. Asset management firms had two options: 1) build the ETF division of their firm from within, or 2) acquire an ETF company and its existing team and/or ETF products.

IndexIQ was acquired by New York Life. Janus bought VelocityShares. Oppenheimer Funds bought RevenueShares (full disclosure: my former employers). Hartford Funds acquired Lattice Strategies. Columbia Threadneedle bought Emerging Global Advisors.

If you’re a big asset management firm acquiring a small ETF firm, you want to put your strengths to use (your brand, large distribution force, and large amount of capital). You need to acquire an ETF company that enables you to do that. The sweet spot for an acquisition is an ETF company that is small enough in assets under management (AUM) that it isn’t an impossibly steep price, yet large enough in assets that your firm has a head start on distribution and marketing. Combine that sweet spot of assets with a decent length of time for their ETFs track record, and you have a company that is an ideal acquisition target.

If you looked at the list of ETF Companies in the U.S. at the start of 2014, there was a decent number of acquirable firms in that AUM and track record sweet spot: ~$500 million — $5 billion in AUM and three to eight years of track record.

At the start of 2017, the ETF landscape looks very different for potential ETF company acquirers.

Looking at the ETF league table from ETF.com, let’s categorize all the ETF product lines/companies that have over $1 billion in AUM. I’ll use some very official divisions to categorize why they’re either totally not acquirable or near impossible.

The “You Can’t Buy Us, but Maybe We’ll Buy You” Division

1. BlackRock — A.U.M. = $1.056 Trillion
2. Vanguard — A.U.M. = $670 Billion
3. State Street — A.U.M. = $540 Billion
4. Invesco PowerShares — $120 billion
5. Charles Schwab — A.U.M. = $67 Billion
6. Guggenheim — A.U.M. = $34 Billion

The Privately Owned/Unicorn Division:

1. First Trust — $45 Billion
2. VanEck — $33 Billion
3. ProShares — $27 Billion
4. Direxion — $11 Billion
5. U.S. Commodity Funds — $4.1 Billion

The “Already Acquired By, or Started By, a Larger Wealth Management Firm” Division

1. ALPS — $14.5 Billion
2. Deutsche Bank — $14.3 Billion
3. Northern Trust — $13 Billion
4. PIMCO — $13 Billion
5. UBS — $7 Billion
6. Barclays Capital — $7 Billion
7. Credit Suisse — $3.5 Billion
8. ETF Securities (has one of the largest European ETF businesses) — $2.3 Billion
9. IndexIQ (acquired by NY Life) — $2.2 Billion
10. OppenheimerFunds (acquired RevenueShares) — $2 Billion
11. Victory Capital Management (acquired Compass EMP — $1.1 Billion

(This division is interesting because you *could try to convince some of these firms* that a spin off of their ETF business would enable it to achieve its full value. We’re assuming that’s too complicated and these firms want to hold on.)

The “We Started Later, But Are Choosing To Go It Alone” Division

1. Fidelity — $6 Billion
2. JPMorgan — $5.2 Billion
3. Goldman Sachs — $3.2 Billion

The “I’m Kinda Seeing Someone Already” Division

1. Global X (partially owned by JPMorgan) — $4.4 Billion

The Exemptive Relief Division

1. Exchange Traded Concepts — $2.5 Billion
2. ETF Managers Group — $1.14 Billion
3. AdvisorShares — $1.1 Billion
4. Millington Securities — $1 Billion

The Wisdomtree Division

1. Wisdomtree

(Can they be bought? Yes. Will they be bought? They’re often thrown around as a target acquisition for one of the behemoth asset management firms, but likely too large and too expensive now.)

OK. That is every ETF company/product line that has over $1 billion in assets. None of them are really acquirable. Yes, there’s always a price, but any firm that can buy the firms above, it probably doesn’t make sense to, and any firm that would like to acquire the firms above, can’t.

Under $1 billion in AUM, we have some very large asset management firms that are either going it alone in building their ETF business line, or bought a small ETF shop mainly as an acqui-hire (saying this because there was either a short track record for the ETF shop acquired, small AUM, or both).

Since the rush of 2014/2015 acquisitions, the options to acquire firms have become much slimmer. If you’re a firm that is looking to buy your way into the ETF space then, what are the best options from what’s left?

Here’s the list of firms under $1 Billion — $200 million in AUM (in millions)

This is a good range to focus on as these firms are large enough to be of interest to a larger firm, or soon could be. Within those, there’s three independent ETF shops to keep an eye on:

1. Pacer Financial
2. O’Shares (FQF Trust)
3. Cambria

Beyond falling in that AUM range, each of them has a product suite that: 1.) can handle a large capacity of assets due to how they’re structured, 2.) their products can be sold in major portfolio allocation segments, and 3.) they each have a product suite that has a theme to them that could be expanded upon by a larger firm for future product development. Those are the key things to look for if you’re considering acquiring your way into the ETF business.

Sure, they each have some flaws in an acquisition scenario (Pacer’s Trendpilot products are more complicated to sell to the average client, O’Shares has a short track record, and Cambria just raised additional capital). If they were perfect though, they’d already be acquired!