The road ahead

Securityholders of Claymore Investments Inc. ETFs met on February 24, 2012, to vote on BlackRock’s proposed acquisition. They voted in favour of the transaction, which paves the way for BlackRock to complete the transaction by the end of March.

What might happen next?

This acquisition brings to fruition a process initiated by Claymore’s current owner, Guggenheim Partners, that started when it put Claymore Canada up for sale in late 2011.

This buyout means BlackRock will have more than 80% ETF market share, up from the 66.5% it commanded on its own as of January 31, 2012.

Such concentration would normally raise eyebrows, but it shouldn’t be a problem given that the ETF space is a subset of the overall money management industry. BlackRock’s iShares is a significant player, but not big enough to raise concerns. From an ETF perspective, this transaction prompts the following questions:

• Will it be good for end users? Or could it stand in the way of innovation—which was at the core of Claymore’s success since entering the space back in 2005?
• What will happen to the Claymore ETF lineup?
• What are the implications for other ETF providers?

The acquisition should provide iShares with a complementary platform. Also, BlackRock may integrate some of Claymore’s innovations in the ETF space (Advantaged; Advisors’ series; DRIP; PACC; SWP etc.) into some, if not all, iShares ETFs.

When the two companies’ CEOs announced the transaction, they stated there was no overlap in the product offerings. However, the resulting ETF lineup will total 82, without counting A-Series and the U.S.-dollar denominated versions of some ETFs. So we expect some consolidation and product reshuffling. There are the following opportunities:

• The RAFI (Fundamental Indexing) lineup totals $529 million. Will BlackRock commit to this methodology? Or will another player take over? PowerShares comes to mind as the logical candidate.
• There will be a combined $10.5 billion of fixed-income assets spread across 22 ETFs. How many U.S. highyield ETFs or short-term bond products are necessary?
• Claymore’s preferred shares ETFs proved vastly more successful than iShares’.
• There are two Dividend ETFs in the Financials sector. There is also overlap with Chinese, Mining, and Energy ETFs.
• Is it necessary to have both an ETF providing S&P/TSX Capped Financials exposure (iShares’ XFN) and an ETF providing exposure to equal-weight banks and life-insurance companies (Claymore’s CEW)?

This was a strategic acquisition, with both defensive and offensive considerations—and ultimately, its longer-term impact on the Canadian ETF space will be most interesting to follow.

Yves Rebetez, CFA, is managing director and editor of ETFinsight.