Big ETF Issuers’ 4Q Earnings Point to Bumpy Road

Still, BlackRock sees exchange-traded fund assets reaching $15 trillion in next few years.

From State Street Corp. to Charles Schwab Corp., big exchange-traded fund issuers reported fourth-quarter results that suggest more rough times lie ahead. 

Assets under management fell, and ETF flows were pinched at the four largest issuers, as volatile markets took their toll and sent investors flocking to cash alternatives. Executives signaled the worst may not be over after 2022, which saw the worst stock markets since 2008 and the biggest bond market decline in history. 

“Global growth continues to slow,” BlackRock Inc. CEO Larry Fink said during the company’s fourth-quarter earnings call. “I fear that we are entering a period of economic malaise.”  

Big ETF issuers reported declining assets as a result of the worst equity markets in decades and a historic slide in bonds. Charles Schwab last week  reported ETF assets dropped 6%, while total client assets plummeted 13%. BlackRock, whose iShares unit is the largest ETF issuer, reported a 16% decline in overall assets under management.  

Meanwhile, State Street said ETF assets under management slumped 14% last year after “lower period-end market levels, institutional net outflows and the impact of currency translation,” according to State Street Vice Chairman and Chief Financial Officer Eric Aboaf during an earnings call with analysts and investors.   

ETF Flows Slow  

ETF flows eased as passively managed funds lured less capital than in the years prior. ETFs brought in $614 billion in 2022 compared with the record $900 billion the previous year, according to ETF.com data. 

Passive fund inflows for Atlanta-based Invesco shrank 32% to $7.3 billion from a year ago, while full-year flows into passive funds more than halved to $27.8 billion from 2021. Total ETF assets declined to $1.5 trillion from $1.6 trillion in last year’s fourth quarter for Charles Schwab.  

State Street, the third-largest U.S. ETF issuer, said ETF assets under management slumped 14% to $1.02 trillion by the end of 2022, while BlackRock’s iShares unit reported inflows fell for the year to $220 billion from $306 billion in 2021.  

Still, those figures were better than the assets shed by firms’ actively managed, mutual fund counterparts. Invesco’s actively managed funds shed $28.3 billion last year, compared with 2021’s $18.2 billion in inflows. Schwab reported $6.7 billion in outflows from its mutual fund and ETF products in December alone.  

Mutual funds shed more than $1.1 trillion in 2022, trumping the $13 billion that exited the year prior, and marking the greatest outflows the investment vehicle has seen, according to Bloomberg data.  

Despite shrinking assets and outflows, BlackRock President Rob Kapito predicted the ETF industry will reach $15 trillion in “the next few years” from the nearly $6.5 trillion in assets it currently holds.

Fixed Income in Focus  

Bond markets faced the worst year in history in 2022. Yet investors poured billions into the often hard-to-access fixed income market at the same time via ETFs. That segment is set to grow as bond ETF offerings continue to expand, according to executives at multiple ETF issuers.  

iShares reported the second-best quarter in the firm’s history for its fixed income ETF lineup, which brought in $47 billion in the fourth quarter.  

“The role of bonds in the portfolio is increasingly relevant for the first time in years,” BlackRock’s CEO Larry Fink said during an earnings call with analysts and investors.  

Despite outflows from fixed income products at Invesco, CEO Martin Flanagan noted that “as interest rates stabilize, we have a significant opportunity to capture growth in fixed income capabilities in 2023,” during the firm’s fourth-quarter earnings call.  

He went on to state that “within the ETF franchise, fixed income continues to be an opportunity. The strength has come historically from equities, but we surely think we have the capabilities to grow the ETF franchise in fixed income.” 

Contact Shubham Saharan  at  [email protected]