Earlier this week, Northern Trust, the Chicago-based asset manager best known for its banking and wealth management divisions, announced a second foray into the exchange-traded fund world with the debut of four FlexShares ETFs. The launch comes a little over two years after the closing of First Trust’s inaugural attempt in the ETF game with 17 NETS funds. This time the company is looking to do a much smaller launch with far more focused products, potentially sparking investor interest with its concentrated efforts.
In the release, the company looks to offer investors new ways to play both the equity and bond spaces with the launch of the following funds:
- FlexShares Morningstar U.S. Market Factor Tilt Index Fund (TILT)
- FlexShares Morningstar Global Upstream Natural Resources Index Fund (GUNR)
- FlexShares iBoxx 3-Year Target Duration TIPS Index Fund (TDTT)
- FlexShares iBoxx 5-Year Target Duration TIPS Index Fund (TDTF)
For the equity products, TILT and GUNR, both offer investors a relatively unique look at their respective corners of the market. First, the domestic equity fund looks to give investors a fundamental approach to broad market investing. The product seeks to enhance exposure to the broad U.S. stock market by tilting the portfolio toward the long-term growth potential of the smaller cap and value segments. This is done by applying a mutli-factor modeling approach that hopes to enhance portfolio risk/return characteristics. This results in a portfolio that is vastly different from market cap-weighted funds as the product has close to 44% of its assets in large caps and a similar number in small caps. Mid caps make up the remainder of the portfolio, giving the fund an interesting big/small tilt.
The natural resource fund, on the other hand, looks to give more specialized exposure to the commodity producer space with a heavy focus on "upstream" producers. Basically, the fund will look to go long in commodity producing firms that are at the source of production, giving high weights to miners, energy drillers and producers, agricultural commodity producers as well as timberland and water resource companies.
The fund currently consists of about 108 holdings with the vast majority going toward large caps in the space. Top individual components include well-known names such as Potash Corp of Saskatchewan (POT), Exxon Mobil (XOM) and Australia’s BHP Billiton (BHP). The fund will likely see heavy competition from a number of entrenched competitors, but its focus on upstream producers could give it a leg up in its quest for AUM.
In the TIPS space, the two fresh launches, TDTT and TDTF, look to compete with a host of similar funds from a wide variety of large ETF issuers. Both funds will target their respective duration levels in the TIPS market giving investors far more zeroed-in exposure than the products that are in the space. Currently, the category is dominated by the iShares Barclays Treasury Inflation Protected Securities Fund (TIP) which has over $20 billion in assets while two other funds, WIP and STPZ, have more than $1 billion each as well.
Investment in some of the more specialized products has seen high levels of inflows as the 0-5 Year Fund has more than $225 million in assets while the longer duration product, LTPZ, which focuses on 15-plus year TIPS, has accumulated $330 million. Given these heavy inroads by these funds, it may be difficult for the FlexShares to strip away assets and accumulate a large following. With that being said, the space is rather large - close to $24 billion is invested - so more granular exposure could see some inflows for those looking to fine-tune their duration profile.
The first time Northern Trust tried its luck in the ETF world, things didn’t exactly go as planned and the company was out of the industry in a blink of an eye. The Chicago-based bank launched 17 ETFs in the spring of 2008 including a variety of ETFs focused on developed and emerging markets from around the world. Yet the weak economy and the still small base of the ETF business at the time helped to push Northern Trust to make a quick exit after only eight months in existence. At the time, the 17 products in the company’s lineup had aggregate assets of under $35 million, so it is pretty safe to say that all were money losers for the company. Now that the ETF industry has pretty much seen assets double since that time, and thanks to the relatively novel nature of many of the FlexShares products, hopefully Northern Trust will have an easier path the second time around with its FlexShares products.
Disclosure: No positions at time of writing.
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