(Bloomberg) -- Over 17 years, Simon Klein has helped transform the ETF division of Deutsche Bank AG into a $200 billion powerhouse across Europe. Now he’s embarking on perhaps his biggest mission yet: Battling for the number-two spot as competition heats up. 

Thanks to BlackRock Inc.’s staggering dominance, issuers are left fighting for second place in Europe’s $1.9 trillion exchange-traded fund industry. Unlike in the US, where Vanguard Group is slowly closing the gap to the world’s largest asset manager, the Larry Fink-led business is almost untouchable across the Atlantic. 

With 43% of all European ETF assets, BlackRock’s market share is more than triple its nearest rival and higher than its roughly 32% share in America. And on Tuesday, the firm announced its first foray into active stock ETFs in Europe with two new equity-income products. 

Last year, BlackRock sucked in nearly half of all new cash entering the industry, keeping its lead essentially impregnable, data compiled by Bloomberg Intelligence show. 

It leaves the likes of Klein, global head of sales for Xtrackers, the ETF brand of Deutsche’s DWS unit, fighting to rule the half of the market that remains. The German bank currently boasts about 10% of all assets, two percentage points below second-placed Amundi SA. The latter leapfrogged DWS when it acquired French rival Lyxor from Societe Generale SA three years ago. 

“Our momentum is strong,” Klein said in an interview. “I’m optimistic that we will regain the number two spot and take it from there. And I think we are still at the beginning in Europe.” 

That’s the silver lining for fund issuers in the region who have been left far behind by BlackRock. True, assets are still less than a quarter of $8.8 trillion in the US, which in absolute terms is pulling in more money. But the European market has grown faster and has more than doubled assets over the last five years. 

There are a litany of well-known reasons why Europe’s ETF market has struggled to match the US in scale, from the fragmentation of stock exchanges across national borders to the investment vehicles lacking the tax advantage they enjoy in America. 

Yet the kinds of trends that transformed US investing are creeping in, as more retail investors take charge of their portfolios via trading apps and websites, and institutions warm to the generally cheaper and easier-to-trade structure. 

For the last two years, in an unprecedented divergence, mutual funds in the region have posted outflows while ETFs gathered assets, data from an industry group show — a now entrenched hallmark of the market across the pond. And if the US experience is any guide, the growing liquidity and asset base will spur lower fees, even more inflows — and potentially the dominance of just a few giant money managers.

“This is clearly a business where size matters and scale matters,” said Benoit Sorel, the global head of ETF, indexing and smart beta at Amundi, Europe’s largest asset manager with $2.25 trillion. “Amundi has a huge and fantastic presence in the retail market in Europe and knows this market better than anyone. So I think we’re fantastically positioned to benefit.”

Klein at DWS estimates the percentage of retail clients in Europe’s asset-management market will double over the next five years to 40%. A major tailwind has been the proliferation of ETF savings plans, a German invention that lets retail investors put regular, small sums into the product. A September report co-authored by BlackRock and German information portal extraETF projects their number will expand about fourfold to 32 million by end-2028 to run €64 billion ($69 billion).

Sorel and Klein both touted their firms’ partnerships with digital platforms in multiple countries, and said they are looking for more tie-ups as they attempt to capture this emerging client base. 

With so many new investors and the equity bull run, unsurprisingly the European ETFs with the largest inflows in the past year have been big index vehicles tracking the likes of the S&P 500 or MSCI World Index. That’s another trend benefiting BlackRock, but its rivals are trying to carve out their own edge.

DWS launched 36 ETFs last year, its highest number ever, with many offering exposures to government bonds and sustainability themes.  

Amundi’s Sorel also highlights the focus on corporate engagement and voting on sustainability issues, saying they help the firm stand out even on common indexes. But, for all the growth, the new executive — who joined Amundi from BlackRock late last year — is realistic about the mission. 

“To be clearly a leader in this market — I’m not saying the leader, but to be a leader in this market — is clearly our ambition,” he said.

BlackRock’s dominance owes a lot to its first-mover advantage. Its global iShares brand, bought from British bank Barclays Plc in 2009, is built around some of the world’s earliest ETFs. (Of the 100 oldest European ETFs still alive, 65 are now iShares.) With no giant pan-European rival to challenge its expansion across disparate markets, and aggressive pricing and sales, the firm has cemented its leadership in a way that has been impossible in the US.

“Everybody else had this very sticky link to their fund structure,” said Joy Yang, head of product management and marketing at MarketVector Indexes, an index provider. “There’s a lot of concern if you’re a Schroders or an abrdn and you launch an ETF, are you just doing the same thing?”

BlackRock’s chief financial officer has described the growth of the European ETF scene as “staggering” and “incredible.” The firm has moved to tap into the emerging cohort of retail traders in the region, including by offering their ETFs on platforms like eToro and Moneyfarm in two new partnerships announced this month. 

“We’re still scratching the surface in terms of ETF familiarity,” Brett Pybus, BlackRock’s head of iShares EMEA product strategy, said in an interview in London. “We’ve seen indexing and ETFs grow really spectacularly year on year, even against really challenging market backdrops.”

The chances of the European ETF boom ever matching that of the US — where even the most traditional active managers are now rushing to launch ETFs or convert their mutual funds — remain slim. While the region is edging closer to at least unifying its market data in a consolidated tape, making liquidity in shares including ETFs easier to find across various trading venues, governance regimes and the investor base remain fragmented. In many markets, retrocession fees — commissions paid to advisers for putting client money in particular funds — still sway inflows.

Nevertheless, there’s a growing sense that a major shift is underway. In a survey of 127 money managers across Europe published last month by ETF consultancy Blackwater, 92% of respondents indicated they had plans to launch ETFs or intensify due diligence on integrating them to their offerings within the next two years.

“The asset base is growing quickly because new investors are coming every day to the market,” Klein at DWS said. “If you see how far it can go in the US, we are at the beginning.”

--With assistance from Chris Miller.

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