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iShares attracted net inflows of US$221-billion in 2022, down 28.3 per cent from a record US$308-billion in 2021, Morningstar data show, in a year in which overall global ETF inflows fell 32.8 per cent from US$1.29-trillion to US$867-billion.BRENDAN MCDERMID/Reuters

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BlackRock Inc.’s iShares exchange-traded fund (ETF) arm dethroned arch-rival The Vanguard Group Inc. 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 closest rivals State Street Global Advisors and Invesco Ltd. suffering deeper wounds from souring market sentiment.

Europe- and Asia-based investment houses also fared far worse than their U.S. 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 [such as] defensive or income-[generating] in particular,” says Todd Rosenbluth, head of research at consultancy VettaFi LLC.

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

Vanguard’s inflows fell further, by 39.7 per cent from US$355-billion to US$214-billion, according to Morningstar data, allowing iShares to claim the 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 US$2.1-trillion, compared to iShares’ 11 per cent decline to US$2.9-trillion.

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

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

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

State Street and Invesco, the number three and four providers by assets, suffered far worse, with State Street’s net flows sliding 71.9 per cent and Invesco’s 55.7 per cent, in both cases to US$29.2-billion.

Mr. Rosenbluth attributes this to market dynamics.

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

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

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

Mr. Rosenbluth says 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 Chase & Co. managed to increase its ETF assets by 24.6 per cent to US$99.8-billion to move into the top 10 of the global rankings, thanks to the conversion of some of its mutual funds to ETFs and rising demand for active ETFs. These factors also aided Dimensional Fund Advisors LP, which enjoyed a 60 per cent jump in assets to US$72.4-billion.

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

Ms. Kashner notes that JPMorgan’s Equity Premium Income ETF JEPI-A had the eighth-largest flows in the U.S. 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 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 US$15-billion and Direxion a 729 per cent jump to US$11-billion – 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,” says Ms. Kashner, with these vehicles accounting for 5.2 per cent of U.S. 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-Q and Direxion’s Daily Semiconductor Bull 3x Shares SOXL-A.

“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,” Ms. Kashner says.

Last year’s losers were concentrated among Europe- and Asia-owned issuers. The nine largest – Nomura Holdings Inc., Amundi, DWS Xtrackers, Nikko Asset Management, Daiwa Securities Group Inc., UBS Group AG, Mitsubishi UFJ Financial Group, Global X ETFs 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 U.S.,” says Mr. Lamont.

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

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