ETF growth being powered by three key trends, says Northern Trust’s FlexShares

Feb 23rd, 2017 | By | Category: ETF and Index News

FlexShares has reported a 55% growth in ETF assets during 2016, the second highest among the 20 largest ETF sponsors in the US, and significantly above the 20% rate of growth in total assets recorded across the entire US ETF industry, according to Morningstar figures.

Shundrawn Thomas, Head of FlexShares ETFs at Northern Trust

Shundrawn Thomas, Head of FlexShares ETFs at Northern Trust.

Northern Trust, the asset manager behind the FlexShares brand of ETFs, said the rapid growth in ETF assets was being driven by three key trends: regulatory change, keen interest from institutional investors and the increasing use of ETFs within multi-asset class strategies.

Shundrawn Thomas, Head of FlexShares ETFs at Northern Trust, commented: “The efficiency and continued innovation of ETFs has really driven demand. They deliver the transparency, cost efficiency, and simplicity that many investors have come to appreciate and value following the 2008 financial crisis.”

Thomas notes the increased regulatory change and uncertainty in the US fund industry following 2008 has spurred institutional demand for ETFs as investors have sought more efficiently priced products with simpler fee structures. Even with the growing possibility in a pullback of those regulations, he believes the focus on efficiency is here to stay.

“Partly driven by regulation and partly driven by investor preference and demand, we have seen increasing ETF adoption by institutional users such as public funds, foundations, endowments and asset managers,” Thomas said. “In particular, institutions are investing in ETFs to make significant changes in their fixed income portfolios because of liquidity constraints as well as regulatory and market structure changes.”

ETFs have also grown in popularity as tools within multi-asset portfolio solutions. While difficult to track, Morningstar estimates as of the end of 2016 indicate that ETFs comprise half of portfolio holdings in multi-asset class solutions. With a relentless drive for efficiency, managers of these solutions see ETFs as the preferred vehicle to represent asset classes in their funds due to their ability to provide broad low-cost exposures.

“There is tremendous interest from investors to find consistent and persistent returns. And it’s even better when those returns can add value at attractive cost. Multi-asset class strategies, especially those that use ETFs, are built to help address that need,” said Bob Browne, Chief Investment Officer at Northern Trust.

Strong flows into the ETF space, coupled with growing competition among providers in the industry, is serving to further drive costs lower – the median expense ratio for US ETF sponsors was 72.8 bps at the end of 2016, down from 75.0 bps at the end of 2015.

However, the attraction of ETFs is beyond price, Thomas said, noting that “ETFs are popular because they continue to creatively address investor needs.” Product innovation has come in phases over the years, including equity indexing; the introduction of fixed-income, commodities and real estate products; alternatively weighted indices and strategic beta; and finally actively managed ETFs.

“The drive toward investment strategies that efficiently capture compensated risk factors and active risk has accounted for much of the interest in alternatively weighted index strategies, the basis for many of our products,” Thomas said. “We try to build products around the way investors think. Investors have clear objectives. We develop investment strategies tailored to meet those objectives.”

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