How iShares built a new investment category
Creating a new category or subcategory involves finding and evaluating a concept, introducing it into the marketplace, creating barriers to competitors, and actively managing the perceptions, attitudes and behaviors toward it. This last task is often foreign to marketers more comfortable in building brands than categories or subcategories. Yet that is what is needed. BGI’s (Barclay Global Investor’s) took on the task of educating and promoting a new class of investments, namely ETFs or exchange traded funds. In doing so they not only made the category visible to a wide audience, but made their brand its exemplar, the brand that represents the category. A Harvard case documents (9-2080033).
An ETF is basically a collection of stocks that represent a market (such as the S&P 500) or segment of a market (such as gold or pharmaceuticals or Brazil). Like an index fund it enjoyed very low costs. However, unlike an index or mutual fund, an investor could buy or sell holdings during the day rather than waiting for the end of the day. Further, the holdings are known to the investor on a daily basis (vs. quarterly for some funds). Additionally, ETFS were tax efficient in that the transactions of the fund did not participant a taxable event for the investor.
ETFS were actually first introduced by State Street Global Advisors in 1993 under the brand SPDR (spider). In 1995 Barclays bought the Wells Fargo Nikko Investment Advisors business which had its legacy in the pioneering work on index funds in the early 1970s and formed BGI. A year later, BGI began managing the ETF products for Morgan Stanley brands as WEBS. In 2000, BGI came to believe that ETFs were relatively unknown and had the potential to be a major investment vehicle. As a result they committed to bring the category out into the open. The vehicle was the iShares series of ETFs with some 56 funds and a category promotion campaign..
One target was the retail investor especially those that had burned by single stock picks. A key vehicle was a $12 million advertising effort to explain ETFs. Another target was the advisory community. Three sales teams were assigned to bring the concept to three groups of firms influencing the retail investor, national full service firms, small or midsize firms, and independent financial advisors. A set of “ETF kits” were created so that the advisors could in turn explain the concept to the customers and when it would be appropriate. Education seminars were held throughout the in major markets. There was a comprehensive, award-winning website with comparison charts and e-learning presentations. The motivation was that the advantages were so compelling when the concept was understood that and when it was apparent that a reliable firm was behind it, that investors would be affected. A total of over 100 million was invested over six years.
BGI was blessed with the fact that Vanguard’s Bogle believed that ETFs were competitive and inferior to his index fund strategy. As a result Vanguard was slow to introduce ETF products and was slow to market them.
In 2001 the total ETF market was 80 billion and BGI has 20% of it. By 2006 the category was over $400 billion and BGI share was around 65%. Competitors now joined the bandwagon but iShares has on ongoing brand advantage. Even in 2011 when the ETF market was estimated to be over 800 billion BGI still had close to a 50% share against some aggressive, large rivals.
The decision to make the ETFs a major investment vehicle could have been done by State Street, Morgan Stanley, or a number of other institutions. There was no secret sauce that was unavailable to others. But they either lacked the motivation, the resources, or the confidence to commit to doing so. In a competitive arena were differentiation is difficult the decision to commit to the category creation task by BGI paid off.
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