BlackRock, Inc.’s (NYSE:BLK) iShares business led the global ETF industry in 2016, winning a record $140bn in new flows, powered by moves into bond, Core and smart beta ETFs. Representing 13% organic growth, iShares 2016 flows reflect the global scale, diverse product range and continued innovation of the iShares business.

Overall, the global ETF industry saw net inflows of $375bn in 20161, surpassing the previous year’s total of $348bn2.

Records posted across the board2:

• A new growth record set in the U.S. with net inflows of $107bn (2015: $97bn) and market leading $32bn of net inflows in Europe. iShares was the market share leader in both regions (US: 38%, Europe 61%). Asia Pacific clients also set a record for iShares ETFs bought this year, adding over $10bn3.
• iShares bond ETFs gathered a record $60bn, capturing 52% of all net inflows into bond ETFs globally. U.S. listed AGG saw the greatest net inflows of any bond ETF with $11.2bn. iShares bond ETFs attracted record net inflows in the U.S. ($38bn) and Europe ($21bn).
• Demand for iShares global smart beta ETFs surged to record highs, with $20bn of net inflows. iShares was number one in smart beta market share globally (37%), led by $9bn of net inflows into minimum volatility ETFs, with USMV seeing net inflows of $4.2bn.
• iShares Core ETFs added a record $67bn in global net inflows, led by IVV ($13bn) and AGG ($11.2bn). BlackRock re-priced its U.S. iShares Core ETFs in October and since then investors have adopted iShares Core ETFs faster than expected, adding $27bn.
• Institutional investors looking for simpler, less costly alternatives to derivatives switched around $10bn to iShares ETFs from futures or swaps positions.

Mark Wiedman, Global Head of iShares and Index Investments at BlackRock, said:

"iShares ETFs are helping investors of all sizes build more efficient and precise portfolios. In a year marked by unprecedented political change and periods of significant market uncertainty, investors turned to ETFs in record numbers to express market views, seek outperformance and invest for the long term.”

“We believe we are still in the early stages of a historic shift to ETFs and indexing more broadly. We believe trillions of dollars will move over the next few years as institutional adoption of ETFs and the move to fee-based advice in the retail sector both gather momentum. Investors continue to embrace the efficiency, quality, and value of indexing to execute long or short term investment ideas.”

BlackRock’s outlook for ETFs and Index Investing in 2017:

1. Active versus passive will be replaced by active and passive. As investors demand both value and premium service from their financial advisors and investment managers, investors will increasingly build active portfolios by using ETFs and index funds alongside high conviction alpha strategies.

2. Wealth managers will continue to move from product selection to portfolio construction. As the move towards fee-based financial advice picks up pace, wealth advisors will replace costly index-hugging active managers with lower-cost index exposures for the core of client portfolios.

3. Bond ETFs will continue to lead the way to bond market modernization. Bond ETF adoption will ramp up as the market infrastructure deepens and advisers turn to low cost, scalable ETFs in an increasingly fee-based environment. The bond ETF will continue to re-shape the way buyers and sellers trade bond risk, and play an instrumental role as investors seek to navigate a rising rate environment and generate income in portfolios.

4. Investors will move to factor-based ETF strategies that seek to capture underlying drivers of returns. Within smart beta, multifactor and single factor ETFs will be a major driver of growth - alongside minimum volatility strategies - as retail and institutional investors seek to combine the potential for outperformance with low cost in the centre of their portfolios. Smart beta innovation will also likely be seen within fixed income.

5. Institutions will increasingly turn to ETFs as replacements, or reference assets, for derivatives products. As banks’ balance sheet costs continue to increase, so too has the cost of using futures and swaps. ETFs now typically represent not only the more cost efficient option, but can also offer greater operational simplicity and more precise exposures.

Regional perspectives

U.S.

Martin Small, Head of U.S. iShares at BlackRock, said: “A new era is dawning for advisors and long-term investors. While the future of the DOL fiduciary rule is uncertain, the movement toward fee-based strategies in the retail market is an unstoppable force. Asset and wealth managers are tapping into the ETF movement to reduce the cost and complexity of building great portfolios."

Europe

Rachel Lord, Head of EMEA iShares and Index Investments at BlackRock, said: “ETFs are playing a crucial role in the evolution of the financial industry in Europe. Investors are turning to ETFs for both strategic investments and tactical allocations in their portfolios. These products will continue to be the often unseen engine behind financial solutions that are helping people across the continent invest their savings and meet long-term goals on behalf of clients.”

Asia Pacific

Susan Chan, Head of Asia Pacific iShares at BlackRock, added: “All types of investors across the Asia Pacific region increased usage of iShares ETFs in 2016, resulting in a record year of inflows. Adoption of fixed income ETFs in the region far outstripped any previous years, reflecting ETFs’ ready convenience as allocation tools in response to macro events, and the increasing usage of ETFs in portfolio construction. Both trends highlight our regional clients’ increasing sophistication in ETF usage.”

Latin America

Nicolas Gomez, Head of Latin America & Iberia iShares at BlackRock, added: “Latin American clients continued to turn to our global product lines for liquidity and access to international markets.”

“The evolution of the ETF industry in is in different stages across the various segments of the Latin American market, with pension funds being the biggest users and the rest of the market following their lead. Banks, asset managers, insurance companies, wealth managers and individual investors are rapidly increasing their exposure to international markets via ETFs due to their convenience, cost-efficiency and transparency and their need to diversify their portfolios,” added Gomez.

iShares global AUM was $1.3 trillion as of December 31, 2016.