Where Do ETFs Go After Hitting $500B Inflows?

iShares’ Armando Senra on the significance of the coming moment for ETFs.

Armando Senra is head of iShares Americas at BlackRock, the largest issuer of ETFs in the U.S. ETF.com recently spoke with Armando to get his view on the market as it approaches a watershed moment of $500 billion in inflows within less than a year.

The following transcript has been edited for clarity and brevity.

ETF.com: We’re approaching the $500 billion in inflows mark this year, perhaps by the end of the month, or in early August. To a lot of people, having $500 billion in inflows in U.S.-listed ETFs was unfathomable a few years ago. What does this moment mean for BlackRock’s ETF business?

Armando Senra: It’s just been phenomenal growth in 2021. From our perspective, it took us 15 years for iShares to get to $1 trillion in assets under management in iShares and ETFs, five years to get to $2 trillion, and about two years to get to $3 trillion. The acceleration and the growth has just been phenomenal.

This year, there has been over $90 billion in inflows so far as of July 7 [into iShares U.S. ETFs]. It’s just been historical phenomenal growth for the firm and for iShares. What is really interesting is why the growth continues to accelerate. ETFs have become the essential building block of portfolios.

Both wealth clients and institutional clients are using more ETFs in more ways than ever before, whether it’s the strategic allocation, tactical alocation, liquidity or derivative substitution. Ultimately, it’s good for investors, good for markets. If we continue to deliver for clients, we believe that growth will continue for iShares as well.

ETF.com: What else do you think has led to this growth of adoption, particularly in the first half of the year? It was $507 billion or so in inflows for all U.S.-listed ETFs for all of 2020. But that figure was almost broken a few days ahead of the end of the first half of 2021. What else do you think is leading to this rapid adoption?

Senra: A number of factors. Some of them go back not just to this year, but to 2019, with the introduction of commission-free trading across the major platforms. We’ve seen an acceleration of ETF usage, a very significant acceleration, that started playing out in 2020, but accelerated in 2021, because more people staying at home because of COVID led more people paying attention to their finance.

The market’s rising. That led to more people jumping in the market, and the ETF really becoming such an easy-access, low-cost, tax-efficient vehicle for them to get exposure to the market.

You also have broader growth. When you look at the ETF growth, you have index [products]. But then you also have active products that are now packaged in an ETF format. 

I think the growth is the confluence of work that has been happening for many years, in terms of—at least for us—the build out of a broad set of exposures and innovative products, from broad exposures to factors to sustainable to thematics. That’s all led to more and more use by more investors.

Last year, for instance, you saw a tremendous acceleration of use of fixed income ETFs by institutional buyers. There are a number of factors that have played out that are obviously playing with a lot of strength in 2021.

ETF.com: BlackRock put out its midyear report, and the firm has changed its outlook on U.S. equities down to neutral, when U.S. equities have been really the main driver of a lot of this growth this year. I don’t think anyone’s is doubting that $500 billion in inflows is on the horizon, but do you expect inflow growth will slow in the latter half of the year, based on what BlackRock is predicting?

Senra: In the first part of the year, flows were highly concentrated in U.S. equities, and that’s in line with vaccination rates in the U.S.—a much smoother vaccine rollout than in other parts of the world—and the expected reopening of the economy. 

At the same time, that’s begun to shift. We changed the U.S. outlook to neutral, while at the same time we are overweight in Europe. We’re beginning to see a lot of those flows going into other international markets where the flows weren’t necessarily going with the same strength.

The economic restart is shifting to Europe, Japan and many places around the world. You’re beginning to see more and more portfolios reallocated, and more overweight in those other parts of the market.

We’ve seen a very significant rise in U.S. markets, which, by the way, is not just [because of] vaccination. Ultimately, you have fiscal as well as monetary stimulus playing out. And you have some consumers in the best shape in decades. There are a number of factors playing out that give the U.S. market a lot of strength.

What’s most important is there are other areas of global markets that are still significantly underweight, and if anything, the ETF provides an incredibly useful tool to access those markets. 

ETF.com: With just the changes in the weighting that BlackRock is making, and the kind of macro conditions we’re seeing right now, do you expect to see the rates of inflows start to slow as more people get vaccinated worldwide?

Senra:  No, I wouldn’t say that necessarily [about] the growth rates. Rather, you’re beginning to see significant flows being directed to all the markets that are still underweight, like Europe.

When you look at client portfolios, there was significant underweight of a lot of international markets when the pandemic started. I think you still have a lot of those underweights in place as the economic recovery shifts to Europe. You're going to begin to see more flows into more markets, not just U.S. equities. I think that ETFs play a very significant role in that.

One of our fastest areas of growth for the business is in model portfolios, which are beginning to make more allocations to international markets. Increased use of ETFs in model portfolios will continue to drive ETF growth.

ETF.com: As we approach this milestone, do you think this is a moment where investors view ETFs as something they should look much more deeply at when they're constructing their portfolios?

Senra: I think the ETF has become the essential building block for a portfolio. It gives you access, tax efficiency, low cost. What you have is more and more investors understanding the benefits of ETFs. For example, with fixed income, instead of having 1,000 bonds, investors can have a couple of fixed income ETFs that give them the same exposure in a much more efficient way. And fixed income ETFs represent only 2% of the global fixed income market. Compare that to equities. Equity ETFs are about a little bit less than 10% of the global equity market. So that gives you an idea of the tremendous growth we still have ahead in many segments of the ETF market.

Think about sustainable [investing]. We’re seeing tremendous momentum in sustainable. Sustainable is not a satellite of the client portfolios. More and more investors are thinking about their whole portfolio through a sustainable lens.

We’ve crossed globally $120 billion in [sustainable] assets, and we believe there will be $1 trillion in the category, in both ETFs and index funds, by 2030. So there are many different segments of ETFs where you see tremendous growth still ahead

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