The Challenges—& Successes—Of Running An ETF Biz

January 11, 2017 Beyond hitting that three-year mark, what’s the biggest challenge to growing advisor acceptance of an ETF strategy?
For many advisors, whether you're dealing with an active strategy or an index strategy, the actual performance history matters. We're in an investment business. So for a lot of advisors, looking at both three- and five-year histories is going to matter.

Our experience has been this: Because the ETF space is newer, there's a fair amount of innovation there. What you’ll find is that there’s a certain percentage of the advisor community that I would describe as early adopters. They have both the willingness and the ability to assess newer strategies. They’re not the majority, and there’s no question that having a strong brand helps with early adoption.

When you, the issuer, get the acceleration and move past having just the early adopters, that’s when you start to get to the belly of the curve and reach a broader set of investors. Is FlexShares’ ETF asset growth new money coming in, or are these assets coming from other products within the firm?
Much of our growth is driven by net new flows. Part of it’s market appreciation. What we're really seeing when dealing with advisors—and it can be a long sales cycle—is that we often have success when they're at the point of making another asset allocation decision. That’s because we're focused on long-term investors. Our approach is not to try and find a hot strategy, or what we call the “hot dot,” but to focus on long-term investment portfolios.

We haven't really seen significant shift in any meaningful way from one of our funds to another one of our funds in terms of driving assets. We're seeing more new flows. Do you expect this rate of growth for companies like Northern Trust to continue? Or was 2016—with 50%-plus growth—an outlier year?

Thomas: There's a law of large numbers. We've been moving our way up the league tables, but as you get larger, we’d expect the percentage growth to change, because you're growing off a bigger base.

Still, the opportunity for us is significant. From a flows perspective, consider that, coming into 2016, we ranked 15th in terms of assets in the U.S. ETF industry, but in terms of flows, we ended the year ranked 8th. We're taking market share.


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