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By Ben Johnson, CFA and Christine Benz | 01-28-2016 12:00 AM

ETF Investors Keep It Simple

Despite the profusion of niche ETF products coming to market, investors are still showing a strong preference for low-cost, plain-vanilla equity exposure, says Morningstar's Ben Johnson.

Christine Benz: Hi, I'm Christine Benz for Moringstar.com. Exchange-traded funds garnered near-record inflows in 2015. Joining me to provide a recap of the past year in ETFs is Ben Johnson--he is director of global exchange-traded fund research with Morningstar.

Ben, thank you so much for being here.

Ben Johnson: I'm glad to be here, Christine.

Benz: Ben, when we look back on 2015, it was a very good year for inflows. ETFs saw inflows, as did traditional passively managed funds. Let's talk about the ETF flows. What types of funds were investors buying last year?

Johnson: So, it was the a great year for ETFs. They saw the second-most inflows ever, the second most in terms of number of net new launches ever, and a record numbers of new providers into the ETF space. When you drill down and you look at the types of ETFs that were gaining this net new money, they were generally pretty vanilla. S&P 500 ETFs were amongst the highest receivers of net new inflows. We also saw investors continue to add billions of dollars into developed ex-U.S. equity funds and currency-hedged ETFs--in particular, currency-hedged European-equity ETFs were particularly popular last year.

Benz: So, the idea there is that investors want a piece of foreign-market gains, but they want those gains denominated in U.S. dollars.

Johnson: Right. They want to be long Europe but short the euro.

Benz: So, in terms of new funds, what types of new funds are launching? The flows are going to the very vanilla products, but the launches aren't necessarily happening there.

Johnson: Anything you could imagine is being launched. If you have just the faintest, wildest idea of something--things that you only dream about--ETF providers are now launching that. But if you look at the composition of launches last year--and again, a near-record number of new ETFs were launched last year--it was the first time ever that the majority of new launches were strategic beta ETFs.

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