Signage outside BlackRock headquarters in New York
BlackRock’s iShares is more popular among institutional investors, while Vanguard is more weighted towards retail and wealth management © Bloomberg

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BlackRock’s iShares exchange traded fund arm dethroned arch-rival Vanguard at the top of the global ETF net flows leaderboard last year, returning to pole position after two years in second place.

But the big two also entrenched their duopoly in the ETF industry, with nearest rivals State Street Global Advisors and Invesco suffering deeper wounds from souring market sentiment.

European and Asian-based investment houses also fared far worse than their US peers, with weaker inflows and faster declines in assets under management, while the winners included the fast-growing niche of actively managed ETFs.

BlackRock and Vanguard were “almost neck and neck, and then you have got these up-and-coming ETF firms that are benefiting from either active management or styles that were in favour — defensive or income [generating] in particular,” said Todd Rosenbluth, head of research at consultancy VettaFi.

iShares attracted net inflows of $221bn in 2022, down 28.3 per cent from a record $308bn in 2021, Morningstar data show, in a year in which overall global ETF inflows fell 32.8 per cent from $1.29tn to $867bn.

Vanguard’s inflows fell further, by 39.7 per cent from $355bn to $214bn, according to Morningstar, allowing iShares to claim top spot for the first time since 2019. Despite this, Vanguard’s total ETF assets actually fell slightly less, by 10.3 per cent to $2.1tn, compared to iShares’ 11 per cent decline to $2.9tn.

Bar chart of Net flows ($bn), 10 largest ETF providers showing Vanguard no longer in the vanguard

Kenneth Lamont, senior fund analyst for passive strategies at Morningstar, said iShares’ stronger flow dynamics suggested more investors might have been looking for market exposures not covered by the relatively narrow range of ETFs offered by Vanguard.

“iShares is the dominant player with almost every type of fund on the shelf. Vanguard only offers core products, iShares offers core plus,” Lamont said.

The big two’s somewhat differing client bases, with iShares more popular among institutional investors and Vanguard more weighted towards retail and wealth management, may also have been a factor.

SSGA and Invesco, the number three and four providers by assets, suffered far worse, however, with SSGA’s net flows sliding 71.9 per cent and Invesco’s 55.7 per cent, in both cases to $29.2bn.

Rosenbluth attributed this to market dynamics.

“Demand for low-cost broad market exposure continued in 2022 with iShares and Vanguard dominating with those products. SSGA and Invesco were hurt by limited demand for their flagship growth-oriented SPY [tracking the S&P 500] and QQQ [Nasdaq 100] products as less expensive alternatives and more dividend/low-volatility/equal-weighted strategies were more popular,” he said.

“Invesco lives or dies on ‘the Qs’ in the US,” said Elisabeth Kashner, director of global fund analytics at FactSet, pointing out QQQ is eight times larger than Invesco’s next biggest US ETF.

Bar chart of Change between 2021 and 2022 (%), 10 largest ETF providers showing Mutual fund conversions help JPMorgan make up ground

Charles Schwab, the fifth-largest ETF house, performed better, with only a small decline in both flows and assets.

Rosenbluth said Schwab had historically “been a low-cost provider of building blocks, well diversified index-based products [so] when investors begin adopting ETFs they are one of the beneficiaries of that”.

JPMorgan managed to increase its ETF assets by 24.6 per cent to $99.8bn to move into the top 10 of the global rankings, thanks to conversion of some of its mutual funds to ETFs and rising demand for active ETFs. These factors also aided Dimensional Fund Advisors, which enjoyed a 60 per cent jump in assets to $72.4bn.

“Dimensional has fairly loyal clients who are banging the door down,” Kashner said. “They are in a very enviable position in the industry, and they operate at a really low asset-weighted expense ratio, 23bp, similar to JPMorgan” — cheap by the standards of active management.

Kashner noted that JPMorgan’s Equity Premium Income ETF (JEPI) had the eighth-largest flows in the US last year, which was “really aggressive growth, considering that it only launched in 2020” . It recorded a 3.5 per cent loss in 2022, while the while the S&P 500 was down 18 per cent.

Investors also flocked to leveraged and inverse products last year helping ProShares to rack up a 42.8 per cent rise in inflows to $15bn and Direxion a 729 per cent jump to $11bn — yet both saw assets fall as their geared products typically delivered sharp losses, at least for anyone who held them for an extended period.

“There was a clear demand for geared products last year, way out of proportion to what we have seen in recent years,” said Kashner, with these vehicles accounting for 5.2 per cent of US ETF inflows, according to FactSet, up from 1 per cent in 2021 and the previous record high of 2.5 per cent in 2018, led by ProShares UltraPro QQQ (TQQQ) and Direxion’s Daily Semiconductor Bull 3x Shares (SOXL).

“And boy did these products lose money in 2022. Not everybody is holding them on an intraday basis as they are meant to, so I worry,” said Kashner.

Last year’s losers were concentrated among European and Asian-owned issuers. The nine largest — Nomura, Amundi, Xtrackers, Nikko, Daiwa, UBS, MUFG, Global X and Pimco — all suffered significant falls in both assets and flows, with five of them seeing flows turning negative.

“We might be diverging somewhat. We have war on [the European] continent and all sorts of headaches. There still seems to be more optimism in the US,” said Lamont

“Passive investing is a scale game and the relative success of some of the larger US ETF managers relates to their size and breadth of offering both in the US and in other large markets such as Europe,” he added.

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