Sponsored ETFs continue healthy growth; liquidity cited as big reason

Updated with correction.

Total worldwide assets managed in sponsored exchange-traded funds soared 23.5% to $1.92 trillion as of Dec. 31, according to the latest Pensions & Investments money manager survey.

It is the second straight year that sponsored ETF assets have jumped more than 20%; they jumped 27.4% to $1.55 trillion in 2012, according to P&I data.

Jon Pliner, New York-based senior investment consultant at Towers Watson & Co., said in a telephone interview that the attraction of exchange-traded funds for institutions, in particular, also is growing, particularly as a shorter-term investment.

“From an institutional perspective, they're appealing in their liquidity ... if a sponsor is seeking a shorter-term exposure, whether it (is) through some sort of a transition process or just looking to get the shorter term exposure,” Mr. Plainer said. “They're good vehicles for that,” Mr. Plainer added. “There (are) large levels of liquidity, there's the ease of transactions, etc. What we don't see so much from our client base is a large use of them as longer term exposure for many of our institutional clients. The need for daily liquidity or intraday liquidity is not really there.”

BlackRock Inc. and State Street Global Advisors are by far the two largest ETF managers in P&I's survey with $914 billion and $399 billion, respectively, together comprising 68.5% of the total assets.

While those two managers saw their assets increase 21.5% and 17.2%, respectively, smaller players are seeing their assets rise even more dramatically.

The third and fourth overall leaders in sponsored ETF assets, Vanguard Group Inc. and Invesco, saw their assets jump 35.9% and 47.7% respectively, to $333.87 billion and $94.38 billion.

James Rowley, Malvern, Pa.-based senior investment strategist at Vanguard, said one reason for the boom in ETFs is the overall focus on index funds. “There's a very big focus on low-cost indexing in the past decade,” Mr. Rowley said. “There's an overwhelming amount of assets going into the lowest quartile of costs.”

Other reasons, Mr. Rowley noted, are the transition in the adviser industry to a more fee-based compensation model, as well as the low-cost architecture involved. “Some of our most popular funds are what you might associate with diversified low-cost beta,” said Mr. Rowley.

He cited the Vanguard Total Stock Market ETF, Vanguard FTSE Emerging Markets ETF and the Vanguard Total Bond Market ETF as popular funds.

Bobby Brooks, Boston-based national sales manager for Invesco PowerShares, said the firm's emphasis on smart beta since the founding of its ETF business in 2002, has contributed significantly to the growth in assets.

“Last year in the industry, the smart beta category (overall was) actually growing faster in terms of percentage than the traditional cap-weighted beta,” Mr. Brooks said.

Among the funds that saw significant asset growth in the past year was the PowerShares Buyback Achievers Portfolio, according to Mr. Brooks.

“It's built on the concept of firms and companies buying back their shares,” Mr. Brooks said. “As firms become cash-rich, they either pay out dividends or buy back their shares. In the past we've seen our clients peel some of their business away from the dividend payouts.”

“It fits in that smart beta category,” he added.

Other funds that saw asset growth in the past year were the PowerShares S&P 500 Low Volatility Portfolio and the PowerShares Senior Loan Portfolio, “the first bank loan ETF of its kind,” Mr. Brooks said.

Among the 500 largest managers based on worldwide institutional assets under management with at least $250 million in the sponsored ETFs, Northern Trust Asset Management, Chicago, had the biggest increase for the second year in a row, up 180.8% to $6.7 billion at year-end 2013. A year earlier, Northern Trust reported a 271% jump to $2.4 billion.

Shundrawn Thomas, executive vice president and head of the exchange-traded funds group at Northern Trust Asset Management, said the FlexShares group of 14 index ETF funds and one active fund, has benefited from what he calls a more long-term investor-oriented approach rather than a product-oriented one.

“Most people in the asset management business have a product-oriented strategy where they say "Where is growth happening? What is the hot area?'”

“Investors kind of have four basic categories, objectives or needs: They're trying to grow their assets; they want to manage certain types of risks; they need to have liquidity provided by that portfolio; and they want to generate income,” Mr. Thomas said.

“How we approach product development is: What is the actual investor trying to do and how to we develop products to meet that need?”

Mr. Thomas also noted that their FlexShares' concentrated number of ETF funds is beneficial in a market where “it's not uncommon to see people in past years to see people to come out with 40, 50 or 60 funds.”

Mr. Thomas said one success story is one of the earliest funds offered by Northern Trust, which began its ETF business in September 2011 — its Global Upstream Natural Resources Fund.

“We devised it to have a truly diversified approach in the index,” Mr. Thomas said.

“What we have is what we call our sleeve — energy agriculture, metals both precious and industrial — but we also invest in water and timber.”

“We also felt strongly we wanted global exposure so it's a global fund,” Mr. Thomas said. “The uniqueness of the design of this strategy is very appealing for investors.”

Charles Schwab Investment Management had the next highest increase, up 97.5% to $16.9 billion as of Dec. 31.

John Sturiale, San Francisco-based senior vice president of product management at Charles Schwab Investment Management, said the firm's ETF offerings are concentrated in the core assets of an investment portfolio.

“For example, we're not in sector ETFs. We're not leveraged we're not country specific, we've been in the heart of the portfolio,” Mr. Sturiale said.

“Large blend, small blend, international core, etc. That's where we've concentrated our efforts. Sixteen of the ETFs are cap weighted, and the other (six) are fundamental or alternative weighted.”

Other managers that sponsor ETFs and that saw significant asset increases were: Guggenheim Investments, up 77.9% to $21.7 billion; Pacific Investment Management Co., up 63% to $16.9 billion; and Nomura Asset Management, up 46.8% to $36.2 billion.