By Shundrawn A. Thomas, President of FlexShares
Investing can be complex. As an investor, you are continually confronted with new opportunities and challenges. What’s more, providers offer an ever increasing array of investment products to capitalize on opportunities and address challenges.
Simplicity is one of our core values at FlexShares. We believe our investment solutions and insights should be easy to understand.
Whether thoughtfully communicating the science behind our investment strategies, or providing cogent investment insights, we strive to simplify the investing experience. Sir Isaac Newton observed that truth is ever to be found in simplicity. We find that simple, yet deliberate, disciplines produce truly innovative investment solutions. Likewise simple, yet careful, exploration produces valuable investment insights. To this end, I offer the following perspectives on the ETF marketplace.
My hope is that these unique insights will help simplify your investment experience and encourage your ongoing engagement with FlexShares.
Industry Overview
Exchange-Traded Funds (ETFs) continue to be among the fastest growing product categories in the U.S. asset management industry with a 10-year CAGR of 19.45%. In 2016, growth in the U.S. market increased +19.84% from the prior year to $2.55 trillion in assets as of 12/31/2016.
The total assets at year-end (YE) represented a record total for the industry buoyed by record flows of $284 billion.
2016 flows were driven primarily by U.S. equity (+$168 billion), which more than doubled its inflows from 2015.
Taxable bonds finished with the second most inflows (+$85 billion), which also marked its largest annual inflow ever up from (+58 billion) the prior year. ETFs continue to gain market share among pooled vehicles in the taxable bond category as evidenced by the comparison to the (+$113 Billion) of inflows for taxable bond mutual funds.
Commodities saw the next highest (+$10 billion) as gold strategies were in favor in the early part of 2016. Over the final quarter of the year, however, gold products experienced notable outflows as investors re-allocated to equities and to broader based natural resources exposure.
While this dampened overall commodity flows relative to the start of the year, the overall results were positive.
International equity, which was the star last year, attracted significantly lower flows (+$9 billion) as investors reduced exposure to developed international markets and currency hedged strategies.
Nonetheless, when correcting for the size of the markets, international equities favored emerging markets. Investors in U.S. equites continued to favor the ETF vehicle structure as U.S. equity mutual funds experienced outflows of (-$91 billion).
In 2016, there were 246 new U.S. ETF listings but 124 fund closures, bringing the YE fund total to 1,972. This represented a record number of closures albeit from a larger base. There was more concentration of fund flows among the top 3 providers as they accounted for $254 billion, or 90% of fund flows. This compares to 66% during the prior year. One of the biggest drivers in this year-over year shift was the rebound at a major competitor from annual outflows in the prior year.
Achieving $100 million in AUM within two years of listing for a new fund is an accepted measure of initial success. A decade ago, nine out of ten ETF listings achieved this milestone versus about one in ten today.