ETF Inflows Top $1 Trillion for First | Stock Market News Today


A historic surge of cash has swept into exchange-traded funds, spurring asset managers to launch new trading strategies that could be undone by a market downturn. 

This year’s inflows into ETFs world-wide crossed the $1 trillion mark for the first time at the end of November, surpassing last year’s total of $735.7 billion, according to Morningstar Inc. data. That wave of money, along with rising markets, pushed global ETF assets to nearly $9.5 trillion, more than double where the industry stood at the end of 2018.

Most of that money has gone into low-cost U.S. funds that track indexes run by Vanguard Group,

BlackRock Inc.


BLK 0.66%

and

State Street Corp.


STT -0.50%

, which together control more than three-quarters of all U.S. ETF assets. Analysts said rising stock markets, including a 25% lift for the S&P 500 this year, and a lack of high-yielding alternatives have boosted interest in such funds.  

“You have this historical precedent where you have tumultuous equity markets, and more and more investors have made their way to index products,” said

Rich Powers,

head of ETF and index product management at Vanguard.

Asset managers are looking to actively managed funds, some with narrow themes, in search of an unfilled niche not already dominated by the industry’s juggernauts, analysts and executives said. VanEck, for example, earlier this month rolled out an active ETF targeting the food industry. In March, Tuttle Capital Management launched its

FOMO ETF,

which is bullish on stocks popular with individual investors. 

Firms including Dimensional Fund Advisors have converted mutual funds into active ETFs. Meanwhile, bigger firms have rolled out ETFs that mimic popular mutual funds, including Fidelity Investments’ Magellan and Blue Chip Growth funds.

“We should have a broad offering of ETFs that stand alongside a broad offering of mutual funds,” said

Gerard O’Reilly,

Dimensional’s co-chief executive, of his company. “Choose your own adventure.” 

As ETFs, baskets of securities that trade as easily as stocks, have boomed this year, investors poured a record $84 billion into ones that pick combinations of securities in search of outperformance rather than tracking swaths of the stock market. That represents about 10% of all inflows into U.S. ETFs, up from nearly 8% last year, according to Morningstar. 

Asset managers long known for running mutual funds are rushing to take advantage of investors’ interest in active ETFs. More than half of the record 380 ETFs launched in the U.S. this year are actively managed, according to FactSet. Fidelity, Putnam and

T. Rowe Price

are among the firms that have rolled out actively managed ETFs in 2021. Firms new to ETFs have also entered the fray. 

The top 20 fastest-growing ETFs, largely run by Vanguard and BlackRock, this year pulled in nearly 40% of all flows, charged an average fee of less than 0.10 percentage point and tracked benchmarks of some sort. 

Many active ETFs remain comparatively small and charge fees higher than passive funds, putting a swath of new products at risk of closing over the next several years. ETFs usually need between $50 million and $100 million in assets within five years of launching to become profitable, analysts and executives say; funds below those levels have tended to close. 

Of the nearly 600 active ETFs in the U.S., three-fifths have less than $100 million in assets, according to FactSet data. More than half are below $50 million. 

“You’re going to see a lot of those firms take a hard look at their future,” said

Elisabeth Kashner,

FactSet’s director of ETF research.

The stock market’s bull run has helped buoy many ETF providers, Ms. Kashner said, adding that firms have in 2021 closed the fewest number of funds in eight years. But a market pullback, which most stock-market strategists anticipate, could flush out weaker players, she said. 

Vanguard has been a beneficiary of high inflows to funds that track indexes. A statue of founder John C. Bogle.



Photo:

Ryan Collerd for The Wall Street Journal

ETF closures generally climbed over the past decade, and firms closed a record 277 ETFs last year as the coronavirus pulled markets down. Many held few assets. About a third of all active ETFs are marked as having a medium or high risk of closure, according to FactSet data that take into account assets, flows and fund closure history. 

Factors that have helped stoke active launches, analysts and executives said, include rules streamlined by regulators in late 2019 that made ETFs easier to launch. The approval of the first semitransparent active ETFs, which shield some holdings from the public’s eye, followed.

Analysts also said the success of ARK Investment Management Chief Executive

Cathie Wood

in 2020 showed how active ETFs can score big returns and pull in substantial sums of money. Several of ARK’s funds doubled last year, and its assets approached $60 billion earlier this year, though many of its bets have slumped in 2021. 

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Most other active managers aren’t doing much better. Two-thirds of large-cap managers of mutual funds have fallen short of benchmarks this year, while roughly 10% of the 371 U.S. active ETFs with full-year performance data are beating the S&P 500. More than a third are flat or negative for 2021. 

“Active management is a zero-sum game,” said FactSet’s Ms. Kashner. “Beating the benchmark quarter after quarter, year after year, is a very difficult task at which active managers have traditionally struggled. The ETF wrapper doesn’t change that calculus.” 

Write to Michael Wursthorn at [email protected]

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Vanguard Hits Pause on Fund Ambitions in China | Sidnaz Blog


American financial giant Vanguard Group has suspended plans to launch a mutual-fund business in China.

The Malvern, Pa., firm told staffers in recent days that it was pausing months of preparations to sell its funds to Chinese consumers. The firm had been planning to seek Beijing’s approval for the business.

The $7.2 trillion asset manager has for years aimed to bring low-cost index funds to China, a radical idea in a country where investors prize funds that pick and choose investments to beat markets. But Vanguard executives have now decided that building a meaningful presence in China’s fund industry would take longer than they expected, people familiar with the matter said.

The shift will result in a small number of jobs being eliminated.

Vanguard’s decision stands in contrast to other Wall Street firms, which are continuing a push to get Beijing’s approval to sell their own funds to Chinese consumers. Vanguard is betting that it can reach Chinese individuals another way.

Last April, Vanguard’s joint venture with Ant launched a roboadvisory service that builds portfolios around individuals’ needs.



Photo:

Qilai Shen/Bloomberg News

The firm is focusing its China strategy around a venture with financial-technology firm Ant Group Co. that builds investment portfolios for consumers. The venture fits with Vanguard’s broader ambitions to grow by providing financial advice at a fraction of rivals’ costs. Vanguard said it believes the firm can offer investors more value by delivering financial advice through the venture rather than competing in a crowded fund market.

Vanguard is taking itself out of the running for a Chinese mutual-fund license as U.S.-China trade tensions rise. The firm’s suspension of its plans makes clear that for all the allure of China’s mom-and-pop market, the world’s second largest asset manager won’t jump in at any cost.

Vanguard will have to deal with a potential complication, as it doubles down on its venture with Ant: The Chinese firm is under regulatory pressure and revamping its entire business.

“We believe there is a clear opportunity to meet the growing demand for professional advisory services in China by focusing on our joint venture with Ant at this time,” said Vanguard Chief Executive Officer

Tim Buckley.

The firm said it would maintain a team in Shanghai to support the venture, monitor the market and develop its business.


“Vanguard maintains its long-term commitment to the China market”


— Tim Buckley, Vanguard’s chief executive

“Vanguard maintains its long-term commitment to the China market,” Mr. Buckley said, “and is confident in its ability to continue leveraging its time-tested investment philosophy and approach to fundamentally change for the better how individuals in China invest.”

Since China began letting foreign firms apply for mutual-fund licenses of their own last year, major firms have tried to show Beijing they are all in.

BlackRock Inc.

has received preliminary approval to start a mutual-fund business. Firms including Neuberger Berman and Fidelity International have pending applications.

U.S. firms face significant obstacles in a market in Beijing’s grip. No foreign firms have started selling their own mutual funds to Chinese individuals. Adding another hurdle, Chinese banks and tech giants control distribution channels.

Vanguard executives have less runway than rivals to pursue overseas adventures with no chance of payoff. Owned by investors in its U.S. funds, Vanguard has to keep reinvesting for those clients and lowering the cost of investing for its shareholders.

Vanguard told major Chinese state investors last year it was returning their money and exiting the Chinese institutional business. The firm decided to shut down its Hong Kong office that mainly serviced big clients and wind down Hong Kong-listed exchange-traded funds.

Over the years, executives debated how much to commit to expanding in China.

Vanguard scored political goodwill there as an early supporter of the idea that investors seeking broad emerging-markets exposure should be in mainland stocks. In 2015, before other managers, Vanguard announced it would add China A-shares to its marquee emerging-market index fund.

Vanguard’s chief executive in roughly the decade ending 2017,

Bill McNabb,

said the firm needed to commit resources into China. Mr. Buckley, another top executive, was more cautious and would stress the need for data first to justify the costs, according to people familiar with the conversations at Vanguard.

Mr. Buckley became CEO in 2018 as political relations between the U.S. and China deteriorated. Vanguard took a narrower path in China and refocused the business around providing advice. Last April, the firm’s joint venture with Ant launched a roboadvisory service that builds portfolios around individuals’ needs. More than 500,000 users signed up within the first year.

The firm also made other decisions that went against China’s wishes.

After Bloomberg LP ramped up Chinese exposure of a major bond index starting in April 2019, Vanguard didn’t mirror the full change in funds tied to the benchmark. Vanguard took Bloomberg’s option for more limited China exposure for those funds.

A firm spokeswoman said Vanguard made the decision because of constraints in the region around currency hedging and other transactions that could add costs and tracking error for investors.

Write to Dawn Lim at [email protected]

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Vanguard Charts a Narrow Path in China, Staking Its Future on a | Sidnaz Blog


Wall Street has long cultivated China’s biggest investment institutions to make inroads there. Vanguard Group is betting more singularly on the Chinese consumer.

The Malvern, Pa., firm told some of China’s biggest state investors last year that it would exit its China institutional business and return the billions of dollars managed for them. Instead, the world’s second-largest asset manager is relying on a partnership with Ant Group Co., China’s biggest digital financial firm and an affiliate of e-commerce giant Alibaba Group Holding Ltd., as a main route into China.

Vanguard hopes the venture will give it reach to the roughly one billion users of Ant’s payments service, Alipay—and perhaps a channel to sell Vanguard’s funds later. This move plays to a broader growth plan for Vanguard.

The firm that built a $7.2 trillion asset-management empire on the back of low-cost index funds is betting growth will come from dispensing financial advice at a fraction of rivals’ prices.

But, as Vanguard looks to expand in China, Chief Executive Tim Buckley must also convince Beijing that his firm is as committed to the country as rivals, even after it recently turned away business from some of its big state institutions. Vanguard must also deal with a recent complication: Ant is now revamping its entire business after being warned by Beijing regulators about some of its practices and having its initial public offering scrapped.

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Driving the shifts for Vanguard is that the firm is owned by investors in its U.S. funds, which means executives have little runway to pursue overseas adventures with no payoff or less chance to scale. Its corporate structure pushes it to reinvest for clients and keep lowering the cost of investing for its owners, U.S. customers.

“We are careful to make prudent decisions, both in terms of fund investments and capital expenditures, to ensure we meet this goal,” a spokeswoman said. “Our aim in China is no different from other markets—we’re focused on providing solutions that help individual investors achieve superior investment outcomes over the long term.”

Many of Vanguard’s rivals have stuck with an older playbook.

These firms have for years managed money for China’s institutions, state funds, and the wealthy to build their brand and political goodwill. They have settled for being lesser partners with Chinese banks to reach individual investors.

In 2020, the long-held strategy appeared to bear fruit when Beijing began letting foreign firms apply for mutual-fund licenses of their own. Still, no foreign firms have started selling their own mutual funds to Chinese individuals. They face distribution challenges, too. Chinese banks and brokerages control bricks-and-mortar branches, and internet giants dominate digital channels.

Vanguard decided to chart a new way after months of internal debate. Mr. Buckley and some U.S. executives wanted the firm to focus on the Chinese retail market, rather than sinking resources into big clients that often demanded white-glove service, said people familiar with the matter. The head of Asia at that time, Charles Lin, and other overseas executives argued Vanguard needed to build a name among financial institutions and tried to make the case Vanguard shouldn’t whittle down its options in Asia, the people said.

In late 2019, Mr. Lin departed the firm. In his wake, Vanguard overhauled Asia operations.

The firm exited its Chinese institutional business, informing sovereign-wealth fund China Investment Corp. and the agency managing China’s foreign-currency reserves that it would return their money. Vanguard also decided to shut its Hong Kong office that mainly served big clients, planned to shift its Asia headquarters to Shanghai, announced plans to cease Japan operations and pared back institutional offerings in Australia.

But a move that Mr. Lin helped engineer became central to Vanguard’s pivot.

In 2020, Vanguard and Ant launched a robo-adviser service that builds investment portfolios from funds sold through Ant. Vanguard’s models would decide how a user’s portfolio should be exposed to stocks, bonds and various investments, based on the individual’s needs.

Vanguard representatives hoped to popularize fee-based portfolios filled with low-cost funds and build a following for the index funds Vanguard is famous for. It is a radical idea for China, where people gravitate to pricier funds run by managers for market-beating returns.

Ant representatives wanted the models to include more actively managed funds, some of the people familiar with the matter said. The joint venture incorporated feedback from both stakeholders, adding more active funds.

A spokeswoman for the joint venture said that its investment strategies are “designed, continuously monitored and refined by the company’s independent investment team to best serve the clients’ interest.”

Vanguard hopes its partnership with Ant will give it reach to the roughly one billion users of Ant’s payments service, Alipay.



Photo:

alex plavevski/Shutterstock

The service called “help you invest” in Mandarin had over-500,000 Chinese users at the end of 2020. The firms declined to provide total assets managed. In the 100 days from its April launch, the service had 200,000 customers who had collectively invested the equivalent of more than $300 million, according to an Ant regulatory filing.

“The cornerstone of Vanguard’s strategy in China is the firm’s joint venture with Ant Group,” Vanguard’s spokeswoman said.

Some executives hope the offering will give Vanguard a channel to plug into Ant’s users over time, the people said. If the firm gets approval to sell Chinese mutual funds, Vanguard might then be able to distribute digitally, instead of being forced to rely on Chinese banks for distribution.

But adding a hurdle in China, Vanguard has long resisted paying distributors to sell funds. Vanguard Asia executives cautioned colleagues in the U.S. it wasn’t realistic to expect Ant to distribute funds free to its hundreds of millions of users. Any Vanguard fund would compete against Ant products such as the giant money-market mutual fund Yu’E Bao, which features prominently on the Alipay mobile app.

As Vanguard gets a team in place for a mutual-fund business, rivals are making progress.

BlackRock Inc.

received preliminary approval for a mutual-fund business last year. Fidelity International has responded to regulators’ questions on its application.

Write to Dawn Lim at [email protected] and Jing Yang at [email protected]

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