Since the assets under management in the global ETF industry are highly concentrated on different levels (domicile, promoter, classification) it is not surprising that the assets under management are also highly concentrated on the custodial level. The high concentration of the assets under custody might raise concerns about the competition between the different custodians.

With regard to this, I would agree that a high concentration of assets at a single company in the ETF ecosystem/value chain should raise the attention of market observers and authorities since such a situation can cause some market and/or systemic risk.

Chart 1: ETF Assets Under Custody (in bn USD) by Custodian (October 31, 2024)

Source: LSEG Lipper

That said, asset managers choose their custodians based on the services they need and the price they have to pay for these services, which means that State Street—the largest custodian for the global ETF industry—may either offer better services at the same price than others or charge less for the same service than other custodians and might therefore be the custodian of choice for several ETF promoters around the globe. This means that promoters who are competitors in the markets might have the same custodian for their products, which finally leads to the high concentration in assets at the custodian level.

Even as the high concentration of the assets under custody is the result of the competition between the different custodians, one might still be concerned about the competition since securities services are a business where scale matters. This means that size is a competitive advantage.

Size may enable larger custodians to enter into a price war which may take smaller competitors out of business, as they might not be able to compete with the prices and/or services offered by large custodians. Another benefit from high assets under custody might be the fact that large custodians are able to buy smaller competitors to increase their market share and/or to buy services which they have not offered before. Even as these threats can be seen as real, only time will tell if all custodians will be able to succeed in the very competitive global ETF ecosystem.

Chart 2: Market Share of the 10 Largest ETF Custodians Globally vs. Rest of the Industry (October 31, 2024)

Source: LSEG Lipper

However, it should be borne in mind that even the ETF promoter might become somewhat concerned about the concentration of assets under custody. One example for this might be BlackRock—the largest ETF promoter in the world—which made the decision to split the custody business for its iShares ETFs, to become less reliant to a single custodian. That said, other ETF promoter may follow these steps, to make their business more independent and resilient from a custody services point of view. With regard to this, it will be interesting to observe this sector to see if the concentration of the assets under custody will further increase, or if the ETF promoter will start to spread their assets between different custodians to balance the power of the custodians.

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