The Challenges—& Successes—Of Running An ETF Biz

January 11, 2017

The bulk of ETF assets in the U.S. today sits in the hands of only three issuers—iShares, Vanguard and State Street. These firms dominate asset flows as well as headlines most of the time. But it’s the smaller, up-and-coming providers that are seeing the more impressive relative growth.

In 2016, Northern Trust’s FlexShares saw its ETF assets grow 56% in 12 months, one of the strongest AUM jumps last year among the top 20 issuers. The gains came on the heels of net asset losses of about 7% the year before, making 2016 a stellar year for the firm.

Known for its objectives-based and alternatively weighted strategies, FlexShares launched its first ETFs, including the FlexShares Morningstar Global Upstream Natural Resources Index Fund (GUNR), in September 2011. Today the company commands $12 billion in ETF assets spread across 25 funds, making it the 14th-largest ETF issuer in the country. Shundrawn Thomas, who heads the company’s ETF and mutual funds, tells us how it’s been growing an ETF business, and what trends he sees forging ahead.

ETF.com: What worked so well in 2016 to push FlexShares ETF assets up some 50% in one year?

Shundrawn Thomas: I would say a couple of things have been consistent with respect to our experience over time, and then there’re some things that were the benefit of catching certain trends. All those things came together to drive 2016.

If you look back at 2015, one of the biggest things to impact us was the sell-off in commodities and natural resources. We had a roughly two-year period where we saw many assets move away from that. And one of the first funds we introduced was our global upstream natural resource fund [GUNR]. GUNR is our most successful strategy in terms of asset flows. It has $3.6 billion in assets. We felt that downside in 2015.

But in the past several months, we found many investors who held natural resources as their core holding liked our unique approach there. We don’t skew towards energy, but we allocate to energy, ag, metals, timber and water. We have benefited from demand for long-term portfolios that are balanced for inflation.

Another thing we do well in our alternative weighting schemes is factor-based strategies—another trend that benefited us. And a lot of the funds in our suite were launched in December 2012, so we hit our three-year track record at the end of 2015. As you know, that’s when you move past just your early adopters, because now you're coming up on screens and people are looking at these funds. It's the first time you can get ratings from things like Morningstar. All of that came together in 2016.

And from an overall perspective, our investor-centric approach is embraced by advisors as well as investors. I’m referring to the fact that FlexShares is not product-focused. Rather, all of our funds are specifically designed with the real-world goals of investors in mind. As such, each fund seeks to meet one of four core or fundamental investment objectives—capital appreciation, risk management, income generation or liquidity management. This aligns our value proposition with the needs of investors and the advisors that serve them.

 

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