ETF providers like iShares also have been able to capitalize on strong inflows this year into fixed-income ETFs.
Morningstar data show that iShares fixed-income ETFs had $61 billion in net inflows in the first nine months of 2016 compared with $16 billion for iShares equity ETFs. The inflows for fixed-income ETFs is even more significant when it is considered that fixed-income ETFs make up only 18% of iShares' $1.26 trillion in ETF assets.
Ravi Goutam, managing director and head of iShares' U.S. pensions, foundation and endowment distribution team, said one reason fixed-income ETFs, particularly high-yield ETFs, are becoming more attractive to institutional investors, is that investors are discovering the transaction price can be less than directly buying individual securities.
He said, for example, the bid-ask spread can also be as low as two basis points on a high-yield bond ETF, which is more attractive than the 50 basis points or more an investor could pay buying individual high-yield bonds.
He also said that during the high-yield sell-off in December 2015, iShares' $15.2 billion iBoxx $ High Yield Corporate Bond ETF was a source of liquidity for investors, showing that fixed-income ETF funds can offer investors liquidity even in tough markets.
The ultimate liquidity of fixed-income ETFs during a market crisis has become a concern for some, including the Securities and Exchange Commission, which in October adopted new rules that limit illiquid securities to 15% of the holdings of individual ETFs and mutual funds.
Industrywide, Morningstar data show fixed-income ETFs have had $106 billion in net inflows globally in 2016 through Sept. 30, compared to $93 billion in equity ETF net inflows.
Globally, ETF assets reached $2.5 trillion as of Sept. 30, Morningstar data show, an 8.4% growth rate for the first nine months of 2016 from the same period a year ago.
An October report by consultant Ernst & Young said ETF growth will become even larger. It estimates assets under management in the global ETF market will reach $6 trillion by 2020.
Ranked second by P&I, Vanguard Group does not disclose profits or revenue, but the firm has been rapidly growing with its passive strategies and ETFs.
Vanguard's $2.5 trillion in passive strategies as of June 30 is up more than $1 trillion from 2013.
Kevin Jestice, a Malvern, Pa.-based principal and head of institutional investor services for Vanguard, said institutional flows from defined contribution plans have been strong for several years. But he said growth accelerated in 2016, as litigation by plaintiffs' lawyers against plan sponsors has increased because of the fees charged for active funds in DC plans.
“The trend in the industry is toward increased flows to target-date and index funds, and we are the beneficiary of it,” he said.
Vanguard statistics show the firm had $201 billion in net inflows into index funds in the first 10 months of 2016.
SSgA, with $1.8 billion in index strategies and $494 billion in ETF assets under management, is in the No. 3 spot, shows the P&I Research Center.
SSgA reported $12 billion in net ETF inflows in the third quarter of 2016, the company's third-quarter financial statements show. Joseph L. Hooley, chairman and CEO of SSgA's parent company, State Street Corp., noted in an Oct. 10 conference call with analysts that the ETF inflows drove a 5% corporate revenue uptick from the previous six months of the year.
In an interview with Pensions & Investments, Lori M. Heinel, SSgA's Boston-based senior managing director and deputy global chief investment officer, said attention to fees by investors will help increase usage of ETFs and passive strategies.
“Pressure on fees is becoming more acute,” she said. “The fee pressure will continue to drive adoption of passive, when you couple that with active managers struggling, it leads people down a road.”
The DOL fiduciary rule, which is scheduled to go into effect in April, will also put pressure on 401(k) plan administrators to seek lower-cost options for investment funds, which should also increase the use of passive investment strategies, she said.