When it comes to strategy, some providers of exchange-traded funds—especially start-ups—seem to subscribe to the notion of throwing new products against the wall and seeing what sticks. While that model has experienced varying degrees of success, the gunslinger method toward ETF asset growth has mostly failed.
In 2016, the top asset gainers in percentage terms among the 20 largest ETF providers were VanEck (58% growth in assets under management), FlexShares (55%) and Charles Schwab (51%). While all three firms experienced impressive ETF asset growth, the way they achieved their success was hardly by chance. Moreover, the road to growth among the group offers stark contrasts in how to gain assets in a competitive marketplace.
For example, Schwab has capitalized on its commission-free brokerage platform that now includes more than 200 ETFs from 16 different ETF providers on its Schwab ETF OneSource platform. Aside from appealing to clients who don’t like to pay for brokerage transactions, Schwab has attracted more than $60 billion to its own ETFs. Instead of being satisfied with its competitive position, Schwab has relentlessly chipped away at other ETF juggernauts by steadily reducing fund expense ratios and adding broadly diversified funds to its menu of Schwab-branded ETFs.
FlexShares, which is owned by Northern Trust, has taken a different tack by building an ETF lineup focused on the practical needs of investors. It does this via four strategies: capital appreciation, risk management, income generation and liquidity management. And the company’s funds employ alternatively weighted index strategies with factor tilts.
Meanwhile, VanEck has historically focused its investment practice on international markets and commodities. And while most of the firm’s ETF lineup is still focused on products tied to natural resources and single countries, it has quietly built a roster of income funds covering corporate and municipal bonds, along with higher yielding markets such as master limited partnerships. Last year, VanEck funds such as the Gold Miners ETF (GDX) and Russia ETF (RSX) were lifted by rebounding commodity prices.
ETF Advisor magazine spoke with executives at the three companies to get a better sense of their business strategies and what has driven their growth.
Ed Lopez - Head of ETF product management & marketing at VanEck
DeLegge: Citigroup said commodity assets under management sat at $391 billion as of January 2017, but were actually up more than 50% from the previous year. How is the recovery in commodity prices impacting ETF flows at your firm?
Lopez: The rebound in commodities influenced returns and flows into our natural resources and emerging markets country ETFs, as one might expect, but also into one of our high-yield bond ETFs. Gold and the shares of gold miners experienced a significant rebound in 2016, driving continued flows into the VanEck Vectors Gold Miners ETF (GDX). It’s notable, however, that GDX garnered inflows not only in 2016, but also throughout the preceding downturn in gold prices.
With the rebound in oil prices, our oil-related ETFs, for example, the VanEck Vectors Unconventional Energy ETF (FRAK), saw strong returns in 2016. Russian equities also rebounded, both in terms of returns and flows, having been oversold on U.S. sanctions and energy prices.
Most notable, however, has been the VanEck Vectors Fallen Angel High Yield Bond ETF (ANGL), which, because of the nature of its index, tends to take a contrarian approach. Relative to the broad high-yield market, it was underweight energy during the downturn in energy prices, and then was overweight energy at the start of 2016, having picked up many downgraded energy bond issues. It was one of the top performing high-yield bond funds in 2016 across both ETFs and active mutual funds.
DeLegge: After three consecutive yearly losses, last year was a turning point for precious metals because they finally broke the losing streak. What do you see ahead for precious metals along with related sectors like gold and silver miners?
Lopez: Gold miners have recently improved cost controls, operating results and overall financial discipline. Fundamentally, we believe that miners are still an attractive way to play an increase in gold prices. Keep in mind that 2016 returns reflected a sharp rebound from 2015 bear market levels that were particularly oversold. So far in 2017, though, there hasn’t yet been a solid catalyst to propel gold strongly higher. The firm’s view is that such a catalyst is likely and may come from a geopolitical, economic or financial event that drives investors to seek safe havens, but the timing is hard to predict.
DeLegge: VanEck seems to discover new markets that are either overlooked or don’t exist as an ETF. The recent launch of the VanEck Vectors Green Bond ETF is a good example of this approach. Tell us more.
Lopez: We’ve done many first-to-market ETFs that have given access to opportunities we believe may add value to an investor’s portfolio. Investors, I believe, have become more environmentally conscious and are looking for ways to influence positive environmental change. The green bond market has seen rapid growth over the last couple of years as issuance doubled in 2016 and is expected to do so again in 2017. With green bonds I think the ability to have an impact is very straightforward. These bonds trade like typical bonds, except green bonds have it clearly stated that proceeds are to be used for a green project or projects. Green bonds are issued by governments, supranationals, corporations and other types of issuers. Currently, the index the VanEck Vectors Green Bond ETF (GRNB) seeks to track is globally diversified by country and sector, and includes bonds primarily rated investment grade.
DeLegge: It seems like there’s rekindling of concern about future inflation. How should that impact the way financial advisors build investment portfolios for their clients?
Lopez: We believe inflation over the past year partially stems from a resurgence in commodities prices. Despite ongoing easy monetary policies globally, commodities are not likely to continue to drive inflation in the near term. In addition, the Federal Reserve raising rates will have a dampening effect on inflation. There are expectations that the Fed will raise rates a couple more times this year. Working under the assumption that those rate increases are gradual and reflect an improving economy, we think equities, high-yield or floating-rate fixed income may make sense. That said, when it comes to fixed income, we recognize that investors have several choices. For instance, besides shortening duration they can seek income not directly linked to actions of the Fed. As a case in point, in emerging-markets debt we have recently seen inflows into the VanEck J.P. Morgan EM Local Currency Bond ETF (EMLC), our fund which invests in bonds issued by emerging-market governments and denominated in the local currency of the issuer.
Shundrawn Thomas - Executive vice president and head of funds & managed accounts at Northern Trust (FlexShares)
DeLegge: You’ve neatly organized your ETF lineup into four investing disciplines or strategies. Please elaborate.
Thomas: At FlexShares, our focus is on understanding and responding to investor needs. We start with investors’ goals because that’s what matters to them. We translate those goals into investment objectives which inform our product development and serve as the basis for the four fundamental investing outcomes you referenced. Specifically, FlexShares funds are designed to achieve the targeted outcomes of growing assets, managing risks, generating income and providing liquidity. We refer to this as our solutions framework. Together these outcomes represent the primary aims of individual and institutional investors alike. It is also important to note that we employ an empirically driven approach founded upon detailed analysis, comprehensive research and trend analysis. Our funds deliver all the benefits and features of ETFs: transparency, flexibility, tax efficiency and generally lower costs than other investment vehicles. But rather than simply track a traditional index, FlexShares specializes in alternatively weighted index strategies that are based on innovative index design and development.