Hougan: First Trust's Growing Presence

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

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Reviewed by: Matt Hougan
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Edited by: Matt Hougan

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
IssuerNet FlowsAUM ($M)
Vanguard12,998.37351,156.50
BlackRock4,549.10673,151.07
First Trust3,684.3923,949.29
Guggenheim2,317.7424,378.13
Charles Schwab1,804.8219,012.43
ProShares1,503.7827,395.33
Invesco PowerShares1,481.8099,936.62
Pimco1,219.4214,607.70
Northern Trust779.997,613.55

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.

 

 

IssuerTickerInflowsAUM
iShares Core S&PIVV4,254.8354,366.68
iShares MSCI EAFEEFA-273.5953956.34
iShares MSCI Emerging MarketsEEM90.5931884.49
iShares Russell 2000IWM1,961.0728,813.95
iShares Russell 1000 GrowthIWF362.4322,992.99

 

First Trust’s five most popular ETFs in the first quarter are a ragtag band of merry misfits, each capitalizing on a specific theme.

A few years ago, most ETF experts, myself included, would have laughed at a cloud-computing ETF. Today, the joke’s on us: the First Trust ISE Cloud Computing ETF (SKYY | B-35) pulled in $79 million in the first quarter and is a nearly $300 million fund almost three years after its launch.

IssuerTickerInflowsAUM
First Trust Emerging Markets AlphaDexFEM155.73339.81
First Trust Dorsey, Wright Focus 5FV104.81102.72
First Trust ISE Cloud ComputingSKYY79.48292.60
First Trust Helath Care AlphaDEXFXH78.191,956.41
First Trust Technology AlphaDEXFXL75.74838.34

First Trust’s success proves something important: ETF investors are willing to pay for performance.

 

The firm scuffled along for years with relatively low assets in most of its ETFs, and attracted some criticism for allowing ETFs to wither on the vine with low assets and limited liquidity without closing them. But in recent years, its funds have performed well.

Over the past two years, for instance, the First Trust Health Care AlphaDEX ETF (FXH | B-61) has outperformed the Healthcare Select Sector SPDR Fund (XLV | A-92) by more than 5 percentage points.

Outperformance_Of_First_Trust_ETFs

Whether you believe that performance will persist or not is a fair question. But what’s not a question is that investors are starting to buy in on the belief that it will.

A lot of people are asking questions about whether smart-beta ETFs and actively managed ETFs will gain traction with investors. First Trust’s success suggests both can, and possibly, in a big way.

People do buy performance. But it takes time: You won’t sell much until you have a three-year track record that looks pretty, and a good sales force to get that message out into the world.

First Trust has both, and right now that’s catapulting it into becoming a major ETF provider.


At the time this article was written, the author held no positions in the securities mentioned. Contact Matt Hougan at [email protected].

 

Matt Hougan is CEO of Inside ETFs, a division of Informa PLC. He spearheads the world's largest ETF conferences and webinars. Hougan is a three-time member of the Barron's ETF Roundtable and co-author of the CFA Institute’s monograph, "A Comprehensive Guide to Exchange-Trade Funds."