BlackRock pipped its arch rival Vanguard to the winning post as the race between exchange traded fund (ETF) providers for investors’ cash in 2013 culminated in a photo finish.
Less than $1 billion of inflows separated the first- and third-largest ETF providers by assets respectively, after a year in which Wall Street’s surge to an all-time high provided a significant boost to many US ETF managers.
In comparison, growth for European-based ETF managers was disappointing as they lost market share to their US rivals.
But uncertainty about possible changes to the US Federal Reserve’s bond-buying programme was reflected in choppy monthly ETF flows from May onwards and weighed heavily on investors’ appetite for fixed-income ETFs.
ETFs linked to gold and emerging market equities, two of the main pillars of the industry’s growth in previous years, also suffered large outflows in 2013.
As a result, global net inflows into exchange traded funds and products fell to $243.1 billion last year, down 8.3 per cent from $265 billion in 2012, according to ETFGI, a consultancy that monitors industry trends.
Net global inflows to BlackRock’s range of iShares exchange traded funds and products dropped 30 per cent to just over $61billion in 2013.
Meanwhile, Vanguard’s ETF business enjoyed its best ever year, gathering net inflows of $60.2 billion, an increase of 12.5 per cent on 2012. Vanguard registered faster growth in the US and Canada than BlackRock. However, BlackRock posted a strong performance in Europe, which boosted its overall inflows.
For State Street Global Advisors, the second-largest provider by assets, the distinction of managing the fastest-growing ETF globally in 2013, the SPDR 500 (which pulled in $16.3 billion), was marred by outflows of more than $25 billion from its main gold ETF, the SPDR Gold Trust. Globally, SSgA’s ETF operations attracted inflows of $18.3 billion in 2013, down 52.6 per cent on the previous year.
Hefty selling by gold investors also weighed heavily on ETF Securities. The London-based precious-metals specialist saw outflows of $4.9billion last year, compared with inflows of $2.9 billion in 2012.
However, the wooden spoon for 2013 went to Deutsche Asset and Wealth Management where net redemptions reached almost $6 billion, compared with inflows of $1.4 billion in 2012. DeAWM has introduced changes to its business model, shifting away from derivative-linked ETFs in an effort to respond to growing competition from US managers in Europe.
Other providers that enjoyed a clear benefit from the rally in the US stock market included PowerShares, the fourth-largest provider globally. Its inflows more than doubled to $15.4 billion, helped by strong interest in the PowerShares QQQ ETF, which tracks the Nasdaq 100 index.
Deborah Fuhr, founding partner at ETFGI, said the US, which listed its first ETF just over 20 years ago, is often mistakenly described as “mature”. The spectacular increases in ETF flows for a host of mid-tier providers demonstrated its dynamism.
Charles Schwab, the provider that has been most aggressive in pursuing competition on pricing against Vanguard and BlackRock, saw inflows more than double to $6.2 billion from $2.8 billion in 2012.
Inflows for First Trust surged to $8.2 billion from $1.2 billion in the previous year. Its AlphaDEX-branded range reflected investors’ growing appetite for “smart-beta” solutions.
Guggenheim Investments, which runs a series of equally weighted equity ETFs, saw inflows leap to $6.8 billion from just $0.7 billion in 2012. Guggenheim also offers a suite of target-date fixed income ETFs that have proved highly popular with investors.
Scott Minerd, global chief investment officer at Guggenheim, said the improving performance of the US economy should translate into greater confidence, making investors comfortable with more risk, and leading to a strong performance for US equities in the next few months.
ProShares, which offers a toolkit of “alternative” ETFs, gathered inflows of $5.7 billion, up from just $0.5 billion in 2012. It also benefited from a revival of interest last year in leveraged and inverse ETFs, which multiply index returns. The performance of the US stock market this year is likely to have an important bearing on the performance of the ETF industry.
Russ Koesterich, global chief investment strategist at BlackRock, said the US stock market was facing headwinds from higher interest rates and 2013’s substantial increase in equity valuations, but argued the market should still make further gains in 2014.
“US equities may not be as inexpensive as they were a year ago, but they remain more attractive than bonds and cash,” said Koesterich. He added that international stocks appeared more reasonably priced than US equities and were worth attention.
“We would also encourage investors with longer-term time horizons to consider emerging markets, despite their recent underperformance, as they too offer compelling value,” said Koesterich.