FlexShares cites regulation, institutional
investors and efficiency as key drivers
Rapid growth in ETF assets continued last year, bolstered by
regulatory change, keen interest from institutional investors and
the increasing use of ETFs within multi-asset class strategies,
according to Shundrawn Thomas, who leads FlexShares® Exchange
Traded Funds at Northern Trust Asset Management.
ETF assets rose 20 percent last year and an average of 19
percent a year over the past 10 years to $2.55 trillion as of
December 31, 2016, according to Morningstar. FlexShares’ 55 percent
growth in assets in 2016 was the second highest among the 20
largest ETF sponsors in the U.S. The ETF industry was buoyed by
record flows of $284 billion in 2016. U.S. equities led inflows
with $168 billion, followed by taxable bonds (a record $85
billion), and commodities ($10 billion). Inflows into U.S. equities
more than doubled the 2015 total.
“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 said.
Regulatory Change Spurs Institutional Demand
One of the most notable consequences of the financial crisis has
been regulatory change and uncertainty in the U.S. fund industry.
Thomas argues that this may accelerate the move toward more
efficiently priced products with simple fee structures and even
with the potential to pull back on some of those regulations, he
believes is favorable for the distribution of ETFs and that 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.”
A Cost Efficient Way to Create Multi-Asset Class
Strategies
The trend of more institutional use intersects with the growth
of ETFs in multi-asset class solutions. While difficult to track,
Morningstar estimates as of 12/31/2016, 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.
“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
Asset Management. “We use them in our own multi-asset class
funds.”
The median expense ratio for U.S. ETF sponsors was 72.8 basis
points* (bps) at the end of 2016, down from 75.0 bps at the end of
2015. Inflows into broad-based U.S. equity funds helped to drive
down the overall average. FlexShares ranks in the lowest decile in
terms of the lowest-weighted average price among the 104 U.S. ETF
sponsors.
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 indexes 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.”
ETFs are among the fastest growing product categories in the
U.S. asset management industry with 68 new sponsors entering the
market over the last 5 years. In 2016, according to Morningstar,
growth in the U.S. market increased more than 18 percent from the
prior year to $2.4 trillion in assets as of Aug. 31, 2016. In the
midst of this rapid growth, FlexShares has raised over $12.3
billion in assets since September 2011 to January 2017.
For a copy of Thomas’ 2016 President’s Perspective, please visit
www.flexshares.com.
* A basis point is one hundredth of one percent.
About FlexShares
FlexShares Exchange Traded Funds are designed to pursue specific
investment goals across both passive and active strategies.
FlexShares offers differentiated ETF strategies that improve and
simplify the investment decision process for the long-term
investor.
About Northern Trust
Northern Trust Corporation (Nasdaq: NTRS) is a leading provider
of wealth management, asset servicing, asset management and banking
to corporations, institutions, affluent families and individuals.
Founded in Chicago in 1889, Northern Trust has offices in the
United States in 19 states and Washington, D.C., and 22
international locations in Canada, Europe, the Middle East and the
Asia-Pacific region. As of September 30, 2016 Northern Trust had
assets under custody of US$6.7 trillion, and assets under
management of US$946 billion. For more than 125 years, Northern
Trust has earned distinction as an industry leader for exceptional
service, financial expertise, integrity and innovation. Visit
northerntrust.com or follow us on Twitter @NorthernTrust.
Northern Trust Corporation, Head Office: 50 South La Salle
Street, Chicago, Illinois 60603 U.S.A., incorporated with limited
liability in the U.S. Global legal and regulatory information can
be found at https://www.northerntrust.com/disclosures.
Before investing, carefully consider the FlexShares
investment objectives, risks, charges and expenses. This and other
information is in the prospectus, a copy of which may be obtained
by visiting www.flexshares.com. Read the
prospectus carefully before you invest. Foreside Fund Services,
LLC, distributor.
An investment in FlexShares is subject to numerous risks,
including possible loss of principal. Fund returns may not match
the return of the respective indexes. The Funds are subject to the
following principal risks: asset class; commodity; concentration;
counterparty; currency; derivatives; dividend; emerging markets;
equity securities; fluctuation of yield; foreign securities;
geographic; income; industry concentration; inflation-protected
securities; infrastructure-related companies; interest rate /
maturity risk; issuer; large cap; management; market; market
trading; mid cap stock; MLP; momentum; natural resources; new
funds; non-diversification; passive investment; privatization;
small cap stock; tracking error; value investing; and volatility
risk. A full description of risks is in the prospectus.
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FlexSharesMedia Contacts:Tom
Pinto212-339-7288Tom.Pinto@ntrs.comorDoug
Holt312-557-1571Doug.Holt@ntrs.comwww.flexshares.comFollow Us on
Twitter @FlexSharesETFs
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