The ETF landscape is being shaped by providers who are battling over more competitive fees and new product launches.
Barry Fennell, a senior research analyst at Lipper, says new product launches early this year in response to investors seeking higher yielding funds in a low interest rate environment have aided some ETF providers. He points to the newly launched Pimco Diversified Income ETF and AdvisorShares YieldPro ETF as two examples that are capitalizing off this trend.
Vanguard had the highest inflows during the first quarter at $12.8 billion while State Street struggled with $19.4 billion of outflows, according to data provided by Morningstar. Other fund managers that amassed $1 billion or more in inflows for the first three months of the year included First Trust, iShares, Guggenheim, Charles Schwab, ProShares, PowerShares and Pimco.
"ETFs are continuing to be launched that tend to be suited more toward the perceived product needs of ETF strategists and those investors who traditionally may have favored actively managed mutual funds or individual stock picking as opposed to new products that focus on well covered broad segments of the equity and fixed income asset classes," says Fennell.
Andy O'Rourke, chief marketing officer at Direxion, says financial advisors are driving much of the inflows in 2014. He says some ETF providers have been able to effectively adopt enhanced indexed ETFs that advisors are embracing.
"Many advisors feel that these rules-based index funds can provide access to very smart strategies that could previously only be accessed via actively managed funds or quantitative institutional strategies," says O'Rourke.
James DiLellio, a professor at the Graziado School of Business Management at Pepperdine University, has done extensive research on ETFs and points to many discount brokers reducing commissions on the products to $0 paving the way for increased usage by retail investors and financial advisors.
"Reducing commissions to $0 for selected ETFs have become the new status quo for discount brokers," says DiLellio. "Ameritrade, Fidelity, Vanguard and Schwab now all offer these across a wide variety of asset classes."
Here is what some ETF experts have to say about what is behind ETF flows thus far in 2014.
FIRST TRUST MOVING UP
"First Trust had really strong flows. They're one of the larger ETF providers but not the top three. First Trust had larger flows than iShares. They offer a lot of niche ETFs, or specialty ETFs, that advisors and traders use to round out a portfolio - they have a strong distribution strategy with advisors. They mainly go through advisors. Meanwhile, PIMCO had inflows to ETFs, but despite outflows from its mutual funds. We would expect to see outflows from PIMCO last year, when investors were selling bond funds. But this year, as investors have been returning to bond funds, they have not returned to PIMCO. Investors are obviously reassessing PIMCO in light of the management changes with El-Erian's departure. But within ETFs, PIMCO has been able to generate inflows."
VANGUARD REMAINS ATTRACTIVE
"Vanguard leads the way in the quarter as it continues to be aided by its scale, attractive expense ratios and loyal customer base. Some of the leading Vanguard ETFs in terms of flows were in segments that have offered some compelling reasons recently to invest for ETF buyers. Europe - and much of the developed world - is believed by many to be at an earlier stage in its economic recovery than the U.S. thus potentially offering more upside (Vanguard European Stock Index Fund and Vanguard Developed Market Index). Real estate offers attractive income potential as the yields in the bond market remain unexpectedly low (Vanguard REIT index Fund). Vanguard's broad offerings always remain attractive to investors looking for well diversified passive equity and fixed income exposure (Vanguard Total Stock Market Index and Vanguard Total Bond Market). "
LARGE ETF PROVIDERS BOOMING
"ETFs in 2014 continue to grow at a robust pace. Different ETF providers are reaping the benefits of this growth for different reasons. Large ETF providers, which enjoy significant economies of scale, profit even when they charge rock bottom advisory fees. It is not surprising that Vanguard and Blackrock ETFs are among the leaders in attracting ETF assets. Companies that have ETF line-ups with strategies that are in favor attract more assets than those companies with narrower, out-of-favor product lines. First Trust and Guggenheim ETFs fall within the former category.
ETF shares like mutual fund shares are marketed and sold. ETF providers with strong retail distribution channels will always attract assets. Recent large inflows to Charles Schwab, one of the premiere distributors of investment products, prove this point. Smaller ETF complexes can compete because innovative and proven ideas are often more important in the institutional arena than raw distribution power."
MARKET TITANS LOSING GROUND
"Although comparatively new to the ETF market, Vanguard has gained significant market share at the expense of the market titans BlackRock and SSgA by undercutting their products on fees and rolling out ETFs that go head-to-head with theirs. Case in point, its Vanguard S&P 500 ETF has an expense ratio of just 0.06% compared to 0.09% for SSgA's SPY. As to BlackRock, its biggest revenue-producing ETF, the iShares MSCI Emerging Markets ETF (EEM), is also losing market share to Vanguard's MSCI Emerging Markets fund. The latter is priced at 22 basis points compared to BlackRock's at 72 basis points.
On the distribution side, Vanguard is also deploying significant resources to support the distribution of its ETFs through noncommissioned RIAs by waiving the commission fees for brokerage clients using its products.
Schwab is also following the same market strategy. Last time I checked, SSgA has also committed to a restructuring of its own ETF distribution channels. It has effectively raised its wholesalers' compensation in an effort to catch its competition but many advisers believe that this move comes late in the game."
