Barclays on Friday announced the sale of its asset management business, Barclays Global Investors, to BlackRock for $13.5 billion, a transaction that creates a money management giant.

The sale, a cash and stock deal, gives Barclays a nearly 20% interest in the newly-combined group, which will be renamed BlackRock Global Investors.

State Street Corp. and Vanguard Group, meanwhile, face a new and powerful competitor, say market observers.

Barclays has by far the largest ETF business, so "it could be really challenging for State Street and Vanguard to keep up," said Geoffrey Bobroff, president of Bobroff Consulting in East Greenwich, R.I. "They may be forced to change how they do business."

State Street and Vanguard already trail Barclays Global Investors' iShares unit, which had $290.7 billion of ETF assets at May 31 — or 49.5% of the market. State Street had $143.7 billion, or 24.5%, and Vanguard had $59.5 billion, or 10.1%.

BlackRock has had negligible or no presence in the ETF niche, but a purchase of iShares does more than simply change the nameplate over the funds' door.

Analysts say BlackRock could enhance iShares' ETF lineup by adding actively managed products to index funds for individual investors. Neither Vanguard nor State Street offers actively managed products, and they lack the capability to introduce them.

Bobroff said the New York money manager could introduce an array of actively managed ETFs focused on fixed-income portfolios. "BGI hasn't been a significant fixed-income ETF provider," he said. "There is an opportunity to package a whole bunch of new products here."

Cindy Zarker, a director at Boston's Cerulli & Associates, said she expects BlackRock to introduce actively managed ETFs after the deal's dust settles — and Vanguard and State Street must follow suit. BlackRock Global Investors will gain volume and "all of the core ETF products that are impossible to build at this point."

Most new entrants already are introducing actively managed products rather than index products, Zarker said. Indeed, an executive at State Street said Wednesday that the company plans to get into actively managed ETFs.

But an executive at Vanguard challenged the conventional wisdom, saying her company plans to compete on price to maintain its share. Martha Papariello, a principal at Vanguard who runs its ETF distribution, said she does not expect the company to introduce actively managed products. "I don't believe an acquisition would force us to revamp our strategy," she said.

Vanguard plans to continue competing by offering the least expensive ETFs, she said, pointing out that Vanguard's ETFs cost an average of 30 basis points less than those of competitors. "Who we compete with is out of our control. Our strategy is clear. We want to bring the highest-quality, lowest-cost ETFs to the market," Papariello says, adding that "our point of differentiation is our pricing."

Bobroff believes it would be difficult for Vanguard to introduce actively managed ETFs "because they really don't have those capabilities."

State Street filed an application with the Securities and Exchange Commission 15 months ago to introduce a series of actively managed ETFs. "We plan to introduce actively managed ETFs as soon as we get exemptive relief from the SEC," said James Ross, a senior managing director at State Street.

State Street, which introduced the industry's first ETF in 1993, has started five of the industry's 19 new ETFs this year. Ross expects to continue introducing products as soon as this year. Most of the new products will be indexed, fixed-income ETFs. "I don't think we have to make changes in order to adapt to the competition," Ross said. "Growth is coming from different directions, and we know that we are going to have to be innovative."

W. Christopher Maxwell, a managing partner at the Rock Hall, Md., wealth management firm Conestoga Capital Advisors LLC, said that the jury is still out on actively managed ETFs. Vanguard and State Street will probably look to keep pace by introducing index and sector ETFs. "I think we could see more fixed-income ETFs from both companies," says Maxwell.