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How competitive is the Australian ETF industry?

New analysis from Rainmaker Information shows the Australian ETF industry has become more competitive over the years.

Rainmaker Information head of investment research John Dyall used the Herfindahl-Hirschman Index (HHI), which measures the concentration of players in a particular market and hence its competitiveness, on all broad-based measures including ETF managers' share by total assets as well as revenue.

A score of 2500 and above on the HHI indicates a high-concentration market, followed by moderate concentration for a score of 1500-2500, unconcentrated for a score of 100-1500 and highly-competitive for a score of less than 100.

"...What you really want in a competition is for every team to have a chance of winning at the end of the day. If you have managers which are dominating too much, then the market becomes less competitive, they become price markers [and] there is less power in the hands of the consumers," Dyall said.

"To take the Australian Rules Football [AFL] analogy a bit further, you want the Western Bulldogs to have a chance at winning every year's good for the game. And that's an analogy [I am] trying to string together here and say this is why we want a competitive exchange traded products market here in this country."

Overall, the total market by managers fell into the category of "moderate concentration" with a score of 1961 at March end. It has grown from being highly concentrated at March 2014, showing some improvement on the HHI score every year.

By index providers, the local ETF industry moved from being highly concentrated to moderately concentrated between March 2019 and March 2020.

Going by asset classes, Australian equities were the most competitive while active ETFs and smart beta products had the most concentration.

Read more: Rainmaker InformationHerfindahl-Hirschman IndexJohn Dyall
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