ETFs Hit Record as BlackRock Sees Shift Away From Futures

Should Investors Be Bullish in 2016?
  • Firm says investors replace costly derivatives with ETFs
  • Smart beta products attract a third less money in 2015

A record amount flowed into global exchange-traded funds for a second straight year, BlackRock Inc. said, as investors increasingly are drawn to the products as a replacement for futures and swaps positions.

The industry took in an additional $347 billion globally in 2015, topping the previous year’s record of $330.7 billion, according to BlackRock. The firm grabbed more than a third of the new funds with $129 billion, the most in the industry, it said.

Among new drivers of growth were investors who used ETFs to replace derivatives including futures and swaps. Such conversions brought in $10 billion to BlackRock in 2015, or about 8 percent of the funds it attracted in its ETF business. The trend away from derivatives is helping to buffer slowing expansion in so-called smart beta products, which BlackRock and others have targeted for future growth.

Investors are choosing ETFs as derivatives have become more expensive over the past two years “as regulation such as Volcker and Basel 3 affects the cost capital on bank balance sheets,’’ Susan Chan, the head of iShares Asia Pacific at BlackRock in Hong Kong, said in an e-mail.

Tighter regulations and higher capital requirements in the wake of the global financial crisis have made it more expensive for banks to do business. While that impact has been felt the most in bond markets where banks have cut back dealing and market-making activities, BlackRock’s data show their derivatives businesses may also be suffering as a result of the higher costs.

QuickTake Exchange-Traded Funds

The phenomenon of replacing futures and swaps with ETFs began in 2014 and is mostly concentrated in equities, according to Chan. About 60 percent of conversions took place in the U.S., while Europe saw 35 percent, she said.

“A large pension fund in the U.K. recently bought over $300 million of equity ETFs to replace future positions, so the trend is catching on there,” said Chan. While activity in Asia is at an early stage, she expects growth in the region to accelerate in the future as well.

Investors held 139 million futures contracts globally at the end of November, down 15 percent from a year earlier, according to the latest data available from the World Federation of Exchanges.

Smart beta products, which invest according to factors such as dividends or volatility instead of market capitalization, saw growth in the entire industry slow by a third in 2015, with such ETFs drawing $29 billion in new flows through Dec. 24, down from $45 billion in 2014, according to the firm.

Chan cited sluggish growth in U.S. dividend funds for the slowdown, with such strategies attracting $1.5 billion in 2015, down from $17.4 billion in 2014. Other smart beta products fared better, with ETFs that invest in low-volatility stocks grabbing $10.5 billion, up from $4 billion in 2014, BlackRock said.

Assets for the entire ETF industry swelled to $2.98 trillion through November, doubling since 2010, according to the latest figures made public by the firm. Investors continue to be drawn to the relatively low fees offered by ETFs, even as questions arose last year about the products’ ability to track the value of their underlying assets during times of high volatility.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE