IShares on the Auction Block

British bank Barclays (BCS) said on Monday it’s exploring the sale of its San Francisco-based iShares franchise, the largest exchange-traded fund family in the United States. The iShares line, whose funds hold over $200 billion and account for a 47% market share, could fetch between $3 billion and $7 billion, according to analysts and wire service reports.

The deal continues a growing trend in the ETF industry: consolidation after years of rapid growth. PowerShares and Rydex, two independent ETF sponsors, were swallowed up by larger suitors Invesco and Security Benefit, respectively. Meanwhile, other ETFs from companies like Claymore, Northern Trust and Health Shares have been liquidated or folded into other offerings. A recent report by State Street said that as of Feb. 28 there were 739 ETFs on the market holding $451 billion in assets.

Barclays confirmed the news on Monday, but it was short on the details about who was interested in buying the franchise and what the final price may be. Barclays would only say “it has held discussions with a number of potentially interested parties." Speculators say big mutual-fund companies like Fidelity may be good fits, as would a discount brokerage like Charles Schwab (SCHW).

IShares has been a wildly popular line of funds because it was able to convince financial advisors to use ETFs as a substitute for traditional mutual funds. Indeed, ETFs can be cheaper than mutual funds and offer better trading flexibility and tax efficiency.

But the legion of loyal investors who use the products need not worry. The sale of the iShares business says much more about the climate of the U.K. banking industry than it does about the health and vigor of ETFs. Industry experts don’t expect material changes in the lineup or the fee structure. “I believe the whole process of a transfer would go smoothly,” says Tom Lydon, president of Global Trends Investments and editor of ETFTrends.com. “There’s too much at stake for the whole industry. The iShares brand is profitable and it’s not going away – it’s been great for the Barclays brand.”

Alex Potter, an analyst at Collins Stewart, wrote Monday that Barclays may simply be trying to shore up its balance sheet as the financial crisis in the U.K. pushes rivals such as Royal Bank of Scotland (RBS) and Lloyds Banking Group (LYG) to cede larger stakes to the government in exchange for asset guarantees. While iShares is a low-cost, profitable business that could account for as much as a quarter of annual profits at Barclays Global Investors division, “tough markets evidently lead to tough decisions being taken,” he says.