USA
Northern Trust likes quality
Northern Trust-owned FlexShares is listing three new smart beta ETFs, adding more quality factor funds to its line-up.
All three funds are much the same. They track Northern Trust indexes that start with a broad universe of US, developed market, and EM large and mid caps. They then remove companies of the lowest quality – i.e. those with weak profits, incompetent management and little cash flow.
What companies remain are then picked and weighted based on low volatility and a proprietary quality scoring model. The model receives virtually zero elucidation in the prospectus. Stocks are also picked and weighted to ensure they have market-like sector concentrations.
The add to FlexShares existing haul of quality ETFs, which have been modestly successful.
| Ticker | Fund Name | AUM ($M) | Inception |
| IQDF | FlexShares International Quality Dividend Index Fund | $833 | 2013 |
| QDEF | FlexShares Quality Dividend Defensive Index Fund | $403 | 2012 |
| GQRE | FlexShares Global Quality Real Estate Index Fund | $339 | 2013 |
| IQDE | FlexShares International Quality Dividend Defensive Index Fund | $86 | 2013 |
| QLC | FlexShares US Quality Large Cap Index Fund | $51 | 2015 |
| QDYN | FlexShares Quality Dividend Dynamic Index Fund | $48 | 2012 |
| IQDY | FlexShares International Quality Dividend Dynamic Index Fund | $44 | 2013 |
Analysis – Bring your own assets
When JP Morgan Asset Management’s Japan BetaBuilders ETF hit a massive $3.3 billion AUM in six months, everyone wondered how the new fund got so rich so fast. So the Wall St Journal and FactSet did some digging. As it turned out, JPMAM cannibalised assets from its existing wealth management and private banking clients. This practice of steering clients into in-house funds is called BYOA: bring your own assets. And there is a kind of genius to it.
When new ETFs are brought to market they are disadvantaged because they lack the liquidity and AUM required by gatekeepers. The guardians of retail money typically won’t invest in an ETF until it has a solid track record and less closure risk. By stuffing existing clients straight into your new ETFs – as JPMAM did – you can gift your new ETFs liquidity and gift them assets, eliminating closure risk. In this way, asset managers can BYOA to kick start their products.
We bring this up is because Northern Trust and FlexShares are reportedly one of the biggest practitioners of this. According to the Wall St Journal, a massive 67% of FlexShares’ ETF assets come from existing Northern Trust clients, or around $10 billion of the total $15B FlexShares manages. If these numbers are accurate we can pretty much take it as given who the major buyers of today’s listings will be.