Two trends in the exchange traded products industry were undeniably on prominent display last year: Increased usage of intelligent index or smart beta ETFs and increased development of bespoke ETFs. BlackRock’s (NYSE: BLK) iShares unit, the world’s largest ETF issuer, sees both trends gaining steam this year.
“2013 marked a strong year for ETFs as institutional investors increased their use of ETFs and new institutions such as regional banks, insurance general accounts and new global asset managers ‘test drove’ ETFs for the first time. In 2014, we believe investors will continue to grapple with a slow growth environment, slightly higher interest rates and global political uncertainty that could increase the risk of market volatility. ETFs will often be an important part of institutions’ investment toolkit tactically and strategically due to their ease of use, diversification, liquidity and access to targeted exposures,” said Daniel Gamba, Head of iShares Americas Institutional Business.
Regarding increased customization of ETFs, that trend emerged in earnest last year with more ETF issuers, including iShares, involving clients in the product development process. The result is a win-win for both parties as the client gets an ETF or ETN specifically tailored to its needs and the issuer is able to introduce a new product with a robust amount of capital, often over $100 million in assets.
Some so-called bespoke ETPs that launched last year include the Barclays ETN + Enhanced Global High Yield ETN (NYSEArca: FIGY) and the Barclays ETN + FI Enhanced Europe 50 ETN (NYSEArca: FEEU). Developed for Fisher Investments, FIGY and FEEU had over $2.2 billion in combined assets as of mid-December. [Some New ETFs Are Off to Fast Starts]
The iShares MSCI USA Momentum Factor ETF (NYSEArca: MTUM), iShares MSCI USA Size Factor ETF NYSEArca: SIZE) and iShares MSCI USA Value Factor ETF (NYSEArca: VLUE) were launched by BlackRock at the request of the Arizona State Retirement System and each ETF was seeded with $100 million in capital.
“In order for ETF providers to meet the needs of their clients in 2014, they will have to listen to their clients’ challenges and involve them more in the product development process in order to effectively deliver client-led solutions. iShares, for example, partnered with institutional and advisor clients in 2013 to develop iShares MSCI Factor ETFs and Enhanced ETFs based on their desire for exposure to factors such as value, size, quality and momentum. The positive feedback from the clients is leading iShares to find other similar opportunities in 2014,” according to iShares.
Additionally, iShares sees advisors and investors boosting their usage of smart ETFs. Last year, smart beta ETFs attracted $65.1 billion in new assets, nearly double the $34.2 billion hauled in by the group in 2012. [A Record Year of ETF Inflows]
“iShares expects the interest in non-market cap weighted ETFs such as factor ETFs or minimum-volatility ETFs to continue in 2014. We believe factor and minimum-volatility ETFs will see above-market asset growth given broader acceptance from global pension plans, government institutions, asset managers and registered investment advisors,” said iShares.
Popular iShares smart beta ETFs include the iShares MSCI USA Minimum Volatility ETF (NYSEArca: USMV) and the iShares MSCI USA Quality Factor ETF (NYSEArca: QUAL).