Three Key Trends Driving ETF Growth

February 22, 2017

Media Contacts:

Tom Pinto
Doug Holt

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CHICAGO -- 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. Follow us on Twitter @FlexSharesETFs.

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 www.northerntrust.com/disclosures.

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