Hougan: First Trust's Growing Presence

April 03, 2014

The real story in ETF flows isn’t Vanguard, it’s First Trust.

Everyone, including us, is writing about Vanguard’s massive success in attracting ETF assets in Q1. The Malvern, Pa.-based nonprofit pulled in $13 billion in the first three months of the year, roughly three times its closest competitor, BlackRock. It’s well on its way to becoming the second-largest ETF issuer in the world.

But Vanguard’s success is hardly surprising. It offers low-cost, high-quality funds; has a solid gold reputation; and is phenomenally well run. Be the low-cost provider of a wide array of ETFs and you’ll do well.

But glance down the ETF league table just a smidge and there’s a more interesting story hiding there.

First Trust's Amazing First Quarter
Issuer Net Flows AUM ($M)
Vanguard 12,998.37 351,156.50
BlackRock 4,549.10 673,151.07
First Trust 3,684.39 23,949.29
Guggenheim 2,317.74 24,378.13
Charles Schwab 1,804.82 19,012.43
ProShares 1,503.78 27,395.33
Invesco PowerShares 1,481.80 99,936.62
Pimco 1,219.42 14,607.70
Northern Trust 779.99 7,613.55

Tucked away at No. 3 is First Trust, with $3.7 billion in inflows. To put that in perspective, the Wheaton, Il.-based firm nearly matched industry behemoth BlackRock on flows in the first quarter.

That’s amazing. BlackRock is literally 20 times the size of First Trust. It has a sales force the size of a miniature army and operates out of a shining black megalith in midtown Manhattan.

First Trust, by comparison, is a well-established midsize asset manager that operates out of part of a nice office building in a small—distant-Chicago—suburb that looks a bit like the Mayberry of the Andy Griffith Show.

First Trust is different in other ways, too.

Whereas BlackRock and other large success stories in the ETF space offer mostly plain-vanilla exposure at low costs, First Trust’s ETF family uses a variety of quantitative-driven strategies that attempt to beat the market. It has 39 smart-beta AlphaDex ETFs and another eight that are bona fide active funds, which together make up more than half of the firm's 85 ETFs.

BlackRock’s largest ETF—the $54.4 billion iShares S&P 500 ETF (IVV | A-98)—provides exposure to the world’s most popular index, with an expense ratio of 0.07 percent, or $7 for each $10,000 invested.

First Trust’s largest ETF—the $2.2 billion First Trust Dow Jones Internet ETF (FDN | A-97)—provides exposure to high-tech Internet companies and has an annual expense ratio of 0.60 percent, or $60 for each $10,000 invested.

BlackRock’s five most popular ETFs in the first quarter read like something spit out of a mean-variance optimizer that has built the most boring portfolio in the world.


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