Table of Contents

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FlexShares® Trust

 

Annual Report

October 31, 2023

 

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Table of Contents

 

 

 
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Table of Contents

 

Letter to Shareholders

     2  

Management’s Discussion of Fund Performance

     3  

FlexShares® US Quality Low Volatility Index Fund

     3  

FlexShares® Developed Markets ex-US Quality Low Volatility Index Fund

     5  

FlexShares® Emerging Markets Quality Low Volatility Index Fund

     7  

FlexShares® Morningstar US Market Factor Tilt Index Fund

     9  

FlexShares® Morningstar Developed Markets ex-US Factor Tilt Index Fund

     11  

FlexShares® Morningstar Emerging Markets Factor Tilt Index Fund

     13  

FlexShares® US Quality Large Cap Index Fund

     15  

FlexShares® STOXX® US ESG Select Index Fund

     17  

FlexShares® STOXX® Global ESG Select Index Fund

     19  

FlexShares® ESG  & Climate US Large Cap Core Index Fund

     21  

FlexShares® ESG & Climate Developed Markets ex-US Core Index Fund

     23  

FlexShares® ESG  & Climate Emerging Markets Core Index Fund

     25  

FlexShares®  Morningstar Global Upstream Natural Resources Index Fund

     27  

FlexShares® STOXX® Global Broad Infrastructure Index Fund

     29  

FlexShares® Global Quality Real Estate Index Fund

     31  

FlexShares® Real Assets Allocation Index Fund

     33  

FlexShares® Quality Dividend Index Fund

     35  

FlexShares® Quality Dividend Defensive Index Fund

     37  

FlexShares® International Quality Dividend Index Fund

     39  

FlexShares® International Quality Dividend Defensive Index Fund

     41  

FlexShares® International Quality Dividend Dynamic Index Fund

     43  

FlexShares® iBoxx 3-Year Target Duration TIPS Index Fund

     45  

FlexShares® iBoxx 5-Year Target Duration TIPS Index Fund

     47  

FlexShares® Disciplined Duration MBS Index Fund

     49  

FlexShares® Credit-Scored US Corporate Bond Index Fund

     51  

FlexShares® Credit-Scored US Long Corporate Bond Index Fund

     53  

FlexShares® High Yield Value-Scored Bond Index Fund .

     55  

FlexShares® ESG  & Climate Investment Grade Corporate Core Index Fund.

     58  

FlexShares® Ultra-Short Income Fund (formerly FlexShares® Ready Access Variable Income Fund)

     60  

FlexShares® Core Select Bond Fund

     62  

Statements of Assets and Liabilities

     65  

Statements of Operations

     73  

Statements of Changes in Net Assets

     81  

Financial Highlights

     96  

Schedules of Investments

     127  

FlexShares® US Quality Low Volatility Index Fund

     127  

FlexShares® Developed Markets ex-US Quality Low Volatility Index Fund

     131  

FlexShares® Emerging Markets Quality Low Volatility Index Fund

     137  

FlexShares® Morningstar US Market Factor Tilt Index Fund

     142  

FlexShares® Morningstar Developed Markets ex-US Factor Tilt Index Fund

     178  

FlexShares® Morningstar Emerging Markets Factor Tilt Index Fund

     221  

FlexShares® US Quality Large Cap Index Fund

     275  

FlexShares® STOXX® US ESG Select Index Fund .

     280  

FlexShares® STOXX® Global ESG Select Index Fund .

     287  

FlexShares® ESG  & Climate US Large Cap Core Index Fund

     302  

FlexShares® ESG & Climate Developed Markets ex-US Core Index Fund

     307  

FlexShares® ESG  & Climate Emerging Markets Core Index Fund

     315  

FlexShares®  Morningstar Global Upstream Natural Resources Index Fund

     322  

FlexShares® STOXX® Global Broad Infrastructure Index Fund

     329  

FlexShares® Global Quality Real Estate Index Fund

     336  

FlexShares® Real Assets Allocation Index Fund

     341  

FlexShares® Quality Dividend Index Fund

     342  

FlexShares® Quality Dividend Defensive Index Fund

     349  

FlexShares® International Quality Dividend Index Fund

     354  

FlexShares® International Quality Dividend Defensive Index Fund

     362  

FlexShares® International Quality Dividend Dynamic Index Fund

     369  

FlexShares® iBoxx 3-Year Target Duration TIPS Index Fund

     376  

FlexShares® iBoxx 5-Year Target Duration TIPS Index Fund

     377  

FlexShares® Disciplined Duration MBS Index Fund

     378  

FlexShares® Credit-Scored US Corporate Bond Index Fund

     383  

FlexShares® Credit-Scored US Long Corporate Bond Index Fund

     408  

FlexShares® High Yield Value-Scored Bond Index Fund .

     422  

FlexShares® ESG  & Climate Investment Grade Corporate Core Index Fund

     443  

FlexShares® Ultra-Short Income Fund (formerly FlexShares® Ready Access Variable Income Fund)

     456  

FlexShares® Core Select Bond Fund

     469  

Notes to the Financial Statements

     471  

Report of Independent Registered Public Accounting Firm

     522  

Tax Information

     524  

Fund Expenses

     526  

Trustees and Officers

     530  

Approval of Advisory Agreement

     534  

Supplemental Information

     545  

For More Information

     546  

 

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Table of Contents

 

 

Letter to Shareholders

 

 

Dear Shareholder,

 

The past year reminded investors of the cyclicality – and resilience – of the capital markets. Despite the ongoing challenges of inflation, rising interest rates, and geopolitical uncertainty, we see reason for optimism as we move forward.

 

Having emerged from the pandemic with greater momentum than its peers, we believe the U.S. economy can keep growing at a modest pace through the year ahead. We believe the Federal Reserve’s rate hiking cycle appears to be near, if not at, its peak.

 

Looking abroad, although growth in the Eurozone area has been tepid, unemployment is holding at record lows. Inflation is falling across categories and countries, which may allow workers to achieve real wage gains. Meanwhile, as China’s economy slows after four decades of remarkable growth, other emerging markets are benefiting from improving labor market conditions, fiscal support and excess private savings accumulated through the pandemic.

 

There are, of course, variables that could potentially mitigate these positive trends – not the least of which being geopolitical tensions and the ongoing movement toward global

decoupling. Given the increase in global macro instability, there is higher potential for market volatility. The short-and long-term ramifications should not be underestimated.

 

We are pleased to provide this update for the FlexShares exchange-traded funds, sponsored and managed by Northern Trust Asset Management (“NTAM”), for the year ended October 31, 2023. In addition to financial results for each fund, NTAM explains the factors that have influenced its investment decisions and fund performance. As always, we encourage you to make the Insights Section on our website a destination for up to date analysis and perspective.

 

On behalf of all of us at Northern Trust, I want to thank you for your ongoing confidence and support. We are proud to share our insight and acumen to help you navigate this multifaceted environment.

 

Best wishes to you and yours for a joyful, safe, and prosperous new year.

 

Sincerely,

 

Darek Wojnar, CFA

Senior Advisor, Registered Funds, Northern Trust

Asset Management

 

2    FLEXSHARES ANNUAL REPORT  


Table of Contents

 

FlexShares®   MANAGEMENT’S DISCUSSION OF FUND PERFORMANCE

US Quality Low Volatility Index Fund Ticker:  QLV

 

 

CUMULATIVE PERFORMANCE

Through October 31, 2023

 

LOGO

 

 

AVERAGE ANNUAL TOTAL RETURN

For the period ended October 31, 2023

 

    1 Year     3 Year     Fund
Inception
7/15/2019
 
 

 

 

 

FlexShares US Quality Low Volatility Index Fund
(Based on Net Asset Value)

    4.56     9.46     7.48

FlexShares US Quality Low Volatility Index Fund
(Based on Market Price)

    4.46     9.40     7.47

Russell 1000® Index

    9.48     9.52     9.40

Northern Trust Quality Low Volatility IndexSM

    4.77     9.72     7.76

 

All data as of 10/31/23. Total returns based on market price do not include brokerage commissions that may be payable on secondary market transactions. If brokerage commissions were included, these returns would be lower. Total returns based on market price and net asset value (“NAV”) assume that dividends and capital gain distributions have been reinvested in the Fund at market price and NAV, respectively. NAV is calculated by dividing the total value of all the securities in the Fund’s portfolio plus cash, interest and receivables less any liabilities by the number of Fund shares outstanding. Market price is determined by the midpoint of the bid/ask spread at 4:00 p.m. Eastern Time from the primary listing exchange. Market price returns may vary from NAV returns.

 

Performance quoted represents past performance and does not guarantee future results. The graph and table do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption or sale of Fund shares. Unlike the index that the Fund seeks to track, the Fund’s total returns are reduced by operating expenses, such as transaction costs and management fees. An investor cannot invest directly in an index.

 

Performance reflects contractual reimbursements in effect until March 1, 2024. In the absence of such reimbursements, performance would be reduced. The gross expense ratio of the Fund is 0.23% and the net expense ratio is 0.22%. The gross and net expense ratios disclosed are as reported in the Fund’s prospectus, which may differ from the gross and net expense ratios presented in the Fund’s financial reports. Current performance may be higher or lower than performance shown. Investment return and the principal value of an investment will fluctuate. Shares may be worth more or less than original cost when redeemed or sold in the market.

 

FlexShares ETFs’ performance data current to the most recent month-end is available at www.flexshares.com.

 

PORTFOLIO ANALYSIS

 

The Fund seeks to provide investment results that correspond generally to the price and yield performance, before fees and expenses, of the Northern Trust Quality Low Volatility IndexSM (the “Underlying Index”). The Underlying Index is designed to reflect the performance of a selection of companies that, in the aggregate, possess lower overall absolute volatility characteristics relative to the Northern Trust 1250 Index (the “Parent Index”), a float-adjusted market capitalization weighted index of U.S. domiciled large- and mid-capitalization companies. In addition, the Underlying Index is designed to select companies from the Parent Index that exhibit financial strength, stability and enhanced risk-return characteristics, which Northern Trust Investments, Inc. (“NTI”) believes can provide equity-market participation while seeking to protect against downside risks during certain market environments. As of October 31, 2023, there were 117 issues in the Underlying Index. NTI uses a “passive” or indexing approach to try to achieve the Fund’s investment objective. NTI uses a representative sampling strategy to manage the Fund. This means that the Fund invests in a representative sample of securities that collectively has an investment profile similar to the Underlying Index. The Fund may or may not hold all of the securities that are included in the Underlying Index.

 

During the 12 months ending October 31, 2023, prices on domestic equity securities generally traded higher. Through Q4 of 2022, U.S. equity markets moved modestly lower as inflation remained elevated and the U.S. Federal Reserve (the “Fed”) continued to tighten monetary conditions through rate hikes. U.S. equities rose over the first half of 2023 as investors looked past the collapse of Silicon Valley Bank and the potential of a banking crisis, as inflation declined while Gross Domestic Product (GDP)1 growth was more resilient than expected. The Fed continued to hike interest rates through the first three meetings of the year, but lowered the magnitude of those hikes to one-quarter percent each before pausing at the June 2023

 

1 

GDP is seen as a comprehensive measure of U.S. economic activity which measures the value of the final goods and services produced in the United States.

 

   FLEXSHARES ANNUAL REPORT     3  


Table of Contents

 

FlexShares®   MANAGEMENT’S DISCUSSION OF FUND PERFORMANCE

US Quality Low Volatility Index Fund (cont.)

 

 

 

 

 

 

PORTFOLIO ANALYSIS (cont.)

 

meeting. Over the first six months of 2023, technology companies led all sectors as artificial intelligence related companies drew interest, with seven large cap growth companies contributing a large portion of equity market gains. Domestic equity securities declined in Q3 of 2023 as inflation increased in July and August of 2023, and the Fed reiterated their outlook of “higher rates for longer” than we believe markets had priced in at the beginning of Q3 of 2023. U.S. equity markets continued to decline in October of 2023 as inflation remained resilient, and there were increased concerns of slowing global growth due to weakness in China’s economy.

 

Because U.S. domestic investments trended higher, and higher volatile securities outperformed less volatile securities during the 12 months ended October 31, 2023, we believe the low volatility2 approach was a negative driver of Fund performance for the 12-month period. In addition, we believe that the changes experienced in the macroeconomic environment as well as the increase in interest rates were conducive to high quality factor3 companies, resulting in the high-quality factor exposure augmenting Fund performance over the 12-month period. Overall, the positive performance derived from the quality factor exposure was not enough to offset the negative performance of the low volatility approach, which was the primary source of the Underlying Index’s underperformance against the Russell 1000® Index4 by -4.71%. Tracking difference between the Fund’s NAV and the Underlying Index’s total return for the 12-month period was -21 basis points (“bps”)5, which is reflective of the management fee (-22 bps) and securities lending (+1 bp).

 

2 

Volatility is the measurement of the price movements of a group of stocks over a defined time frame.

 

3 

The quality factor is a factor that seeks to identify companies that exhibit financial strength and stability relative to the Parent Index.

 

4 

The Russell 1000® Index refers to a stock market index that represents the 1000 top companies in the United States.

 

5 

A unit that is equal to 1/100th of 1% and is used to denote the change in a financial instrument.

 

4    FLEXSHARES ANNUAL REPORT  


Table of Contents

 

FlexShares® Developed   MANAGEMENT’S DISCUSSION OF FUND PERFORMANCE

Markets ex-US Quality Low Volatility Index Fund    Ticker:  QLVD

 

 

CUMULATIVE PERFORMANCE

Through October 31, 2023

 

LOGO

 

 

AVERAGE ANNUAL TOTAL RETURN

For the period ended October 31, 2023

 

    1 Year     3 Year     Fund
Inception
7/15/2019
 
 

 

 

 

FlexShares Developed Markets ex-US Quality Low Volatility Index Fund (Based on Net Asset Value)

    10.16     3.15     1.31

FlexShares Developed Markets ex-US Quality Low Volatility Index Fund (Based on Market Price)

    10.41     3.20     1.45

MSCI World ex-US Index

    12.56     5.97     2.93

Northern Trust Developed Markets ex-US Quality Low Volatility IndexSM

    10.30     3.33     1.52

 

All data as of 10/31/23. Total returns based on market price do not include brokerage commissions that may be payable on secondary market transactions. If brokerage commissions were included, these returns would be lower. Total returns based on market price and net asset value (“NAV”) assume that dividends and capital gain distributions have been reinvested in the Fund at market price and NAV, respectively. NAV is calculated by dividing the total value of all the securities in the Fund’s portfolio plus cash, interest and receivables less any liabilities by the number of Fund shares outstanding. Market price is determined by the midpoint of the bid/ask spread at 4:00 p.m. Eastern Time from the primary listing exchange. Market price returns may vary from NAV returns.

 

Performance quoted represents past performance and does not guarantee future results. The graph and table do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption or sale of Fund shares. Unlike the index that the Fund seeks to track, the Fund’s total returns are reduced by operating expenses, such as transaction costs and management fees. An investor cannot invest directly in an index.

 

Performance reflects contractual reimbursements in effect until March 1, 2024. In the absence of such reimbursements, performance would be reduced. The gross expense ratio of the Fund is 0.33% and the net expense ratio is 0.32%. The gross and net expense ratios disclosed are as reported in the Fund’s prospectus, which may differ from the gross and net expense ratios presented in the Fund’s financial reports. Current performance may be higher or lower than performance shown. Investment return and the principal value of an investment will fluctuate. Shares may be worth more or less than original cost when redeemed or sold in the market.

 

FlexShares ETFs’ performance data current to the most recent month-end is available at www.flexshares.com.

 

PORTFOLIO ANALYSIS

 

The Fund seeks to provide investment results that correspond generally to the price and yield performance, before fees and expenses, of the Northern Trust Developed Markets ex-US Quality Low Volatility IndexSM (the “Underlying Index”). The Underlying Index is designed to reflect the performance of a selection of companies that, in the aggregate, possess lower overall absolute volatility characteristics relative to a broad universe of securities domiciled in developed market countries, excluding the U.S. (the “Parent Index”). The Parent Index is a subset of the Northern Trust Global Index, where eligible securities are limited to those securities domiciled in non-U.S. developed market countries and designated as large- and midcapitalization companies by Northern Trust Investments, Inc. (“NTI”), acting in its capacity as the index provider. In addition, the Underlying Index is designed to select companies from the Parent Index that exhibit financial strength, stability and enhanced risk-return characteristics, which NTI believes can provide equity-market participation while seeking to protect against downside risks during certain market environments. As of October 31, 2023, there were 166 issues in the Underlying Index. NTI uses a “passive” or indexing approach to try to achieve the Fund’s investment objective. NTI uses a representative sampling strategy to manage the Fund. This means that the Fund invests in a representative sample of securities that collectively has an investment profile similar to the Underlying Index. The Fund may or may not hold all of the securities that are included in the Underlying Index.

 

During the 12 months ending October 31, 2023, prices on developed international equity securities generally traded higher. Over the course of the 12-month period, the U.S. dollar (USD) declined and positively impacted U.S. investors as returns in international currencies generally were aided by the falling USD. Through Q4 of 2022, developed international markets rose as falling inflation in Europe, a stabilized fiscal environment in the United Kingdom and the anticipated boost to global growth resulting from the re-opening of China’s economy all supported

 

   FLEXSHARES ANNUAL REPORT     5  


Table of Contents

 

FlexShares® Developed   MANAGEMENT’S DISCUSSION OF FUND PERFORMANCE

Markets ex-US Quality Low Volatility Index Fund (cont.)

 

 

PORTFOLIO ANALYSIS (cont.)

 

equity security prices. Developed international equities continued higher in Q1 of 2023 as investors looked past concerns in the banking sector to falling energy prices, lower inflation in Europe, and strength in the technology and consumer discretionary sectors. Developed international equity securities continued higher in Q2 of 2023, but, in the aggregate, lagged U.S. equity markets as regional performance varied greatly between different markets. Japanese equity markets moved higher on the back of corporate governance reform while Eurozone equities benefited from technology and semiconductor companies connected to artificial intelligence. Equity markets in the United Kingdom traded lower in local currency terms, but were positive in USD terms as falling energy prices and monetary tightening by the Bank of England impacted equities. Asia Pacific equity markets excluding Japan were lower as concerns over growth in China due to weak consumer spending as well as increased geopolitical tensions between the U.S. and China impacted the region. Developed international equities declined in Q3 of 2023 as higher energy prices and concerns on consumer spending in China and Europe weighed on investors’ global growth outlook. Developed equities continued lower in October of 2023 as slowing global growth and increased geopolitical tensions weighed on markets.

 

Because developed international investments trended higher, and higher volatile securities outperformed less volatile securities during the 12 months ended October 31, 2023, we believe the low volatility1 approach was a negative driver of Fund performance for the 12-month period. In addition, we believe that the changes experienced in the macroeconomic environment as well as the increase in interest rates were conducive to high quality factor2 companies, resulting

in the high-quality factor exposure augmenting Fund performance over the 12 months. Overall, the positive performance derived from the quality factor exposure was not enough to offset the negative performance of the low volatility approach, which was the primary source of the Underlying Index’s underperformance against the MSCI World ex-US Index3 by -2.26%. The tracking difference between the Fund’s NAV and the Underlying Index’s total return for the 12month period was -14 basis points (“bps”)4, which is reflective of the Fund’s management fee (32 bps), stock selection/futures (+2 bps), securities lending (+2 bps), and dividend tax differential (+14 bps).

 

1 

Volatility is the measurement of the price movements of a group of stocks over a defined time frame.

 

2 

The quality factor is a factor that seeks to identify companies that exhibit financial strength and stability relative to the Parent Index.

3 

The MSCI All Country World Index Ex-U.S. is a market-capitalization-weighted index maintained by MSCI and is designed to provide a broad measure of stock performance throughout the world, with the exception of U.S.-based companies.

 

4 

A unit that is equal to 1/100th of 1% and is used to denote the change in a financial instrument.

 

6    FLEXSHARES ANNUAL REPORT  


Table of Contents

 

FlexShares® Emerging   MANAGEMENT’S DISCUSSION OF FUND PERFORMANCE

Markets Quality Low Volatility Index Fund Ticker:  QLVE

 

 

CUMULATIVE PERFORMANCE

Through October 31, 2023

 

LOGO

 

AVERAGE ANNUAL TOTAL RETURN

For the period ended October 31, 2023

 

    1 Year     3 Year     Fund
Inception
7/15/2019
 
 

 

 

 

FlexShares Emerging Markets Quality Low Volatility Index Fund (Based on Net Asset Value)

    8.52     -0.81     -0.85

FlexShares Emerging Markets Quality Low Volatility Index Fund (Based on Market Price)

    9.01     -1.20     -0.90

MSCI Emerging Markets Index

    10.80     -3.67     -0.94

Northern Trust Emerging Markets Quality Low Volatility IndexSM

    9.39     0.12     -0.06

 

All data as of 10/31/23. Total returns based on market price do not include brokerage commissions that may be payable on secondary market transactions. If brokerage commissions were included, these returns would be lower. Total returns based on market price and net asset value (“NAV”) assume that dividends and capital gain distributions have been reinvested in the Fund at market price and NAV, respectively. NAV is calculated by dividing the total value of all the securities in the Fund’s portfolio plus cash, interest and receivables less any liabilities by the number of Fund shares outstanding. Market price is determined by the midpoint of the bid/ask spread at 4:00 p.m. Eastern Time from the primary listing exchange. Market price returns may vary from NAV returns.

 

Performance quoted represents past performance and does not guarantee future results. The graph and table do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption or sale of Fund shares. Unlike the index that the Fund seeks to track, the Fund’s total returns are reduced by operating expenses, such as transaction costs and management fees. An investor cannot invest directly in an index.

 

Performance reflects contractual reimbursements in effect until March 1, 2024. In the absence of such reimbursements, performance would be reduced. The gross expense ratio of the Fund is 0.41% and the net expense ratio is 0.40%. The gross and net expense ratios disclosed are as reported in the Fund’s prospectus, which may differ from the gross and net expense ratios presented in the Fund’s financial reports. Current performance may be higher or lower than performance shown. Investment return and the principal value of an investment will fluctuate. Shares may be worth more or less than original cost when redeemed or sold in the market.

 

FlexShares ETFs’ performance data current to the most recent month-end is available at www.flexshares.com.

 

PORTFOLIO ANALYSIS

 

The Fund seeks to provide investment results that correspond generally to the price and yield performance, before fees and expenses, of the Northern Trust Emerging Markets Quality Low Volatility IndexSM (the “Underlying Index”). The Underlying Index is designed to reflect the performance of a selection of companies that, in the aggregate, possess lower overall absolute volatility characteristics relative to a broad universe of securities domiciled in emerging market countries (the “Parent Index”). The Parent Index is a subset of the Northern Trust Global Index, limited to those securities domiciled in emerging markets and designated as large- and mid- capitalization companies by Northern Trust Investments, Inc. (“NTI”), acting in its capacity as the index provider. In addition, the Underlying Index is designed to select companies from the Parent Index that exhibit financial strength, stability and enhanced risk-return characteristics, which NTI believes can provide equity-market participation while seeking to protect against downside risks during certain market environments. As of October 31, 2023, there were 163 issues in the Underlying Index. NTI uses a “passive” or indexing approach to try to achieve the Fund’s investment objective. NTI uses a representative sampling strategy to manage the Fund. This means that the Fund invests in a representative sample of securities that collectively has an investment profile similar to the Underlying Index. The Fund may or may not hold all of the securities that are included in the Underlying Index.

 

During the 12 months ending October 31, 2023, prices on emerging market equities generally traded higher. Over the course of the 12-month period, the U.S. dollar (USD) declined and positively impacted U.S. investors as returns in international currencies generally were aided by the falling USD. Through Q4 of 2022, emerging equities traded higher as China relaxed some pandemic-related restrictions, boosting investors’ expectations that increased spending could aid global growth, and that a global recession may be less severe than previously expected. Emerging market equity securities continued to rise in Q1 of 2023 but lagged

 

   FLEXSHARES ANNUAL REPORT     7  


Table of Contents

 

FlexShares® Emerging   MANAGEMENT’S DISCUSSION OF FUND PERFORMANCE

Markets Quality Low Volatility Index Fund (cont.)

 

 

PORTFOLIO ANALYSIS (cont.)

 

behind developed markets as continued monetary tightening across global central banks and increased U.S. and China geopolitical tensions weighed on the region. Emerging market equities continued higher in Q2 of 2023, but again trailed developed equity securities as optimism around China’s reopening was dampened by worse than expected consumer spending. Tensions between the U.S. and China increased as new restrictions around chip manufacturing in both the U.S. and Europe limited Chinese access to these technologies. Emerging equities declined in Q3 of 2023 as weakness in China’s property sector and overall economy negatively impacted global growth. We believe continued economic strength in the U.S. could result in global interest rates remaining at higher levels for longer than anticipated, also impinging on the growth outlook for emerging markets. Emerging markets continued lower in October of 2023 as slowing global growth, weak energy prices and increased geopolitical tensions weighed on markets.

 

Because emerging investments trended higher, and higher volatile securities outperformed less volatile securities during the 12 months ended October 31, 2023, we believe the low volatility1 approach was a negative driver of Fund performance for the 12-month period. In addition, we believe that the changes experienced in the macroeconomic environment as well as the increase in interest rates were conducive to high quality factor2 companies, resulting in the highquality factor exposure augmenting Fund performance over the 12 months. Overall, the positive performance derived from the quality factor exposure was not enough to offset the negative performance of the low volatility factor, which was the primary source of the Underlying Index’s underperformance against the

MSCI Emerging Markets Index3 by -1.41%. Tracking difference between the Fund’s NAV and the Underlying Index’s total return for the 12-month period was -87 basis points (“bps”)4, which is reflective of the Fund’s management fee (-40 bps), stock selection/futures (-26 bps), India Capital Gains Taxes (-20 bps), and the compounding effect of tracking error over time (-1 bps).

1 

Volatility is the measurement of the price movements of a group of stocks over a defined time frame.

 

2 

The quality factor is a factor that seeks to identify companies that exhibit financial strength and stability relative to the Parent Index.

3 

The MSCI Emerging Markets Index is a selection of stocks that are designed to track the financial performance of key companies in fast-growing nations.

 

4 

A unit that is equal to 1/100th of 1% and is used to denote the change in a financial instrument.

 

8    FLEXSHARES ANNUAL REPORT  


Table of Contents

 

FlexShares® Morningstar®   MANAGEMENT’S DISCUSSION OF FUND PERFORMANCE

US Market Factor Tilt Index Fund Ticker:  TILT

 

 

CUMULATIVE PERFORMANCE

Through October 31, 2023

 

LOGO

 

AVERAGE ANNUAL TOTAL RETURN

For the period ended October 31, 2023

 

    1 Year     5 Year     10 Year     Fund
Inception
9/16/2011
 
 

 

 

 

FlexShares Morningstar US Market Factor Tilt Index Fund (Based on Net Asset Value)

    5.67     9.09     9.27     11.56

FlexShares Morningstar US Market Factor Tilt Index Fund (Based on Market Price)

    5.61     9.08     9.25     11.56

Morningstar® U.S. Market Factor Tilt IndexSM

    5.83     9.24     9.42     11.72

 

All data as of 10/31/23. Total returns based on market price do not include brokerage commissions that may be payable on secondary market transactions. If brokerage commissions were included, these returns would be lower. Total returns based on market price and net asset value (“NAV”) assume that dividends and capital gain distributions have been reinvested in the Fund at market price and NAV, respectively. NAV is calculated by dividing the total value of all the securities in the Fund’s portfolio plus cash, interest and receivables less any liabilities by the number of Fund shares outstanding. Market price is determined by the midpoint of the bid/ask spread at 4:00 p.m. Eastern Time from the primary listing exchange. Market price returns may vary from NAV returns.

 

Performance quoted represents past performance and does not guarantee future results. The graph and table do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption or sale of Fund shares. Unlike the index that the Fund seeks to track, the Fund’s total returns are reduced by operating expenses, such as transaction costs and management fees. An investor cannot invest directly in an index.

 

Performance reflects contractual reimbursements in effect until March 1, 2024. In the absence of such reimbursements, performance would be reduced. The gross expense ratio of the Fund is 0.26% and the net expense ratio is 0.25%. The gross and net expense ratios disclosed are as reported in the Fund’s prospectus, which may differ from the gross and net expense ratios presented in the Fund’s financial reports. Current performance may be higher or lower than performance shown. Investment return and the principal value of an investment will fluctuate. Shares may be worth more or less than original cost when redeemed or sold in the market.

 

FlexShares ETFs’ performance data current to the most recent month-end is available at www.flexshares.com.

 

PORTFOLIO ANALYSIS

 

The Fund seeks to provide investment results that correspond generally to the price and yield performance, before fees and expenses, of the Morningstar® US Market Factor Tilt Index (the “Underlying Index”). The Underlying Index is designed to reflect the performance of a selection of companies that, in the aggregate, possess greater exposure to size and value factors relative to the Morningstar US Market Index (the “Parent Index”), a float-adjusted market-capitalization weighted index of U.S.-incorporated large-, mid-, small- and micro- capitalization companies. The Underlying Index seeks to achieve increased exposures to size and value factors, or a “factor tilt,” by adjusting the Parent Index’s constituent weights to achieve a slightly greater weight on companies with smaller market capitalizations or lower valuations, as determined by Morningstar, Inc. pursuant to its index methodology. The Underlying Index is designed to measure the performance of U.S. equity markets with increased exposure toward small-capitalization and value stocks. As of October 31, 2023, there were 2,373 issues in the Underlying Index. NTI uses a “passive” or indexing approach to try to achieve the Fund’s investment objective. NTI uses a representative sampling strategy to manage the Fund. This means that the Fund invests in a representative sample of securities that collectively has an investment profile similar to the Underlying Index. The Fund may or may not hold all of the securities that are included in the Underlying Index.

 

During the 12 months ending October 31, 2023, prices on domestic equity securities generally traded higher. Through Q4 of 2022, U.S. equity markets moved modestly lower as inflation remained elevated and the U.S. Federal Reserve (the “Fed”) continued to tighten monetary conditions through rate hikes. U.S. equities rose over the first half of 2023, as investors looked past the collapse of Silicon Valley Bank and the potential of a banking crisis, as inflation declined while

 

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Table of Contents

 

FlexShares® Morningstar®   MANAGEMENT’S DISCUSSION OF FUND PERFORMANCE

US Market Factor Tilt Index Fund (cont.)

 

 

PORTFOLIO ANALYSIS (cont.)

 

Gross Domestic Product (GDP)1 growth was more resilient than expected. The Fed continued to hike interest rates through the first three meetings of the year, but lowered the magnitude of those hikes to one-quarter percent each before pausing at the June meeting. Over the first six months of 2023 technology companies led all sectors, as artificial intelligence related companies drew interest with seven large cap growth companies contributing a large portion of equity market gains. Domestic equity securities declined in Q3 of 2023 as inflation increased in July and August of 2023, and the Fed reiterated their outlook of “higher rates for longer” than we believe markets had priced in at the beginning of Q3 of 2023. U.S. equity markets continued to decline in October of 2023 as inflation remained resilient and there were increased concerns of slowing global growth due to weakness in China’s economy.

 

Because of the resiliency of the economic data, the falling inflation environment and the rising rate environment, U.S. domestic investments trended higher during the 12 months ended October 31, 2023; however, a large portion of the overall return for market weighted indices was concentrated in seven mega cap growth companies. We believe the value factor2 was a negative driver of Fund performance during the fiscal year ended October 31, 2023, as U.S. value stocks underperformed U.S. growth stocks3. The size factor4 was also impacted by the outsized performance of those mega cap growth companies that contributed outsized performance over the 12 months, resulting in size being a negative driver of Fund performance. Overall, the negative performance derived from both the value and size factors of the Underlying Index were the primary drivers behind the Underlying Index’s

underperformance against the Russell 3000 Index®5 by -2.55%. Tracking difference between the Fund’s NAV and the Underlying Index’s total return for the 12-month period was -16 basis points (“bps”)6, which is reflective of the management fee (-25 bps), stock selection/futures (+4 bps) and securities lending (+5 bps).

 

The Morningstar U.S. Market Factor Tilt Index is the intellectual property (including registered trademarks) of Morningstar and/or its licensors (“Licensors”), which is used under license. The securities based on the Index are in no way sponsored, endorsed, sold or promoted by Morningstar and its Licensors and neither of the Licensors shall have any liability with respect thereto.

1 

GDP is seen as a comprehensive measure of U.S. economic activity which measures the value of the final goods and services produced in the United States.

 

2 

The Morningstar value factor seeks to identify stocks that are inexpensive relative to some measure of fundamental value (e.g., low price/book, low price/earnings, high dividend yields, etc.), which could result in outperformance relative to those that are pricier.

 

3 

Growth stocks are defined as those issued by companies that are anticipated to grow at a rate significantly above the average for the market.

4 

The Morningstar size factor measures a stock’s total capitalization, which can be found by multiplying the current share price by all the outstanding shares of the stock, and seeks to overweight smaller capitalization stocks.

 

5 

The Russell 3000 Index is a market-capitalization-weighted equity index that seeks to track 3000 of the largest U.S.-traded stocks.

 

6 

A unit that is equal to 1/100th of 1% and is used to denote the change in a financial instrument.

 

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FlexShares® Morningstar®   MANAGEMENT’S DISCUSSION OF FUND PERFORMANCE

Developed Markets ex-US Factor Tilt Index Fund Ticker:  TLTD

 

 

CUMULATIVE PERFORMANCE

Through October 31, 2023

 

LOGO

 

AVERAGE ANNUAL TOTAL RETURN

For the period ended October 31, 2023

 

    1 Year     5 Year     10 Year     Fund
Inception
9/25/2012
 
 

 

 

 

FlexShares Morningstar Developed Markets ex-US Factor Tilt Index Fund (Based on Net Asset Value)

    13.21     3.24     2.74     4.48

FlexShares Morningstar Developed Markets ex-US Factor Tilt Index Fund (Based on Market Price)

    14.31     3.45     2.76     4.55

Morningstar® Developed Markets ex-US Factor Tilt IndexSM

    13.31     3.24     2.80     4.56

 

All data as of 10/31/23. Total returns based on market price do not include brokerage commissions that may be payable on secondary market transactions. If brokerage commissions were included, these returns would be lower. Total returns based on market price and net asset value (“NAV”) assume that dividends and capital gain distributions have been reinvested in the Fund at market price and NAV, respectively. NAV is calculated by dividing the total value of all the securities in the Fund’s portfolio plus cash, interest and receivables less any liabilities by the number of Fund shares outstanding. Market price is determined by the midpoint of the bid/ask spread at 4:00 p.m. Eastern Time from the primary listing exchange. Market price returns may vary from NAV returns.

 

Performance quoted represents past performance and does not guarantee future results. The graph and table do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption or sale of Fund shares. Unlike the index that the Fund seeks to track, the Fund’s total returns are reduced by operating expenses, such as transaction costs and management fees. An investor cannot invest directly in an index.

 

Performance reflects contractual reimbursements in effect until March 1, 2024. In the absence of such reimbursements, performance would be reduced. The gross expense ratio of the Fund is 0.40% and the net expense ratio is 0.39%. The gross and net expense ratios disclosed are as reported in the Fund’s prospectus, which may differ from the gross and net expense ratios presented in the Fund’s financial reports. Current performance may be higher or lower than performance shown. Investment return and the principal value of an investment will fluctuate. Shares may be worth more or less than original cost when redeemed or sold in the market.

 

FlexShares ETFs’ performance data current to the most recent month-end is available at www.flexshares.com.

 

PORTFOLIO ANALYSIS

 

The Fund seeks to provide investment results that correspond generally to the price and yield performance, before fees and expenses, of the Morningstar® Developed Markets ex-US Factor Tilt IndexSM (the “Underlying Index”). The Underlying Index is designed to reflect the performance of a selection of companies that, in the aggregate, possess greater exposure to size and value factors relative to the Morningstar Developed Markets ex-US Index (the “Parent Index”), a float adjusted market-capitalization weighted index of companies incorporated in Developed-market countries, excluding the U.S. The Underlying Index seeks to achieve increased exposures to size and value factors, or a “factor tilt”, by adjusting the Parent Index’s constituent weights to achieve a slightly greater weight on companies with smaller market capitalizations or lower valuations, as determined by Morningstar, Inc. pursuant to its index methodology. The Underlying Index is designed to include companies with enhanced risk-return characteristics relative to the broader developed international equity market by featuring size and value risk premiums, which Northern Trust Investments, Inc. (“NTI”) believes have been historically demonstrated over a full market cycle. As of October 31, 2023, there were 3,189 issues in the Underlying Index. NTI uses a “passive” or indexing approach to try to achieve the Fund’s investment objective. NTI uses a representative sampling strategy to manage the Fund. This means that the Fund invests in a representative sample of securities that collectively has an investment profile similar to the Underlying Index. The Fund may or may not hold all of the securities that are included in the Underlying Index.

 

During the 12 months ending October 31, 2023, prices on Developed international equity securities generally traded higher. Over the course of the 12-month period the U.S. dollar (USD) declined and positively impacted U.S. investors as returns in international currencies generally were aided by the falling USD. Through Q4 of 2022, Developed international markets rose as falling inflation in Europe, a stabilized fiscal environment in the United Kingdom, and the anticipated boost to global growth resulting from the re-opening of China’s economy all supported equity security prices. Developed international equities continued higher in Q1 of

 

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FlexShares® Morningstar®   MANAGEMENT’S DISCUSSION OF FUND PERFORMANCE

Developed Markets ex-US Factor Tilt Index Fund (cont.)

 

 

PORTFOLIO ANALYSIS (cont.)

 

2023 as investors looked past concerns in the banking sector to falling energy prices, lower inflation in Europe, and strength in the technology and consumer discretionary sectors. Developed international equity securities continued higher in Q2 of 2023, but, in the aggregate, lagged U.S. equity markets as regional performance varied greatly between different markets. Japanese equity markets moved higher on the back of corporate governance reform, while Eurozone equities benefited from technology and semiconductor companies connected to artificial intelligence. Equity markets in the United Kingdom traded lower in local currency terms, but were positive in USD terms as falling energy prices and monetary tightening by the Bank of England impacted equities. Asia Pacific equity markets excluding Japan were lower, as concerns over growth in China due to weak consumer spending as well as increased geopolitical tensions between the U.S. and China impacted the region. Developed international equities declined in Q3 of 2023, as higher energy prices and concerns on consumer spending in China and Europe weighed on investors’ global growth outlook. Developed equities continued lower in October as slowing global growth and increased geopolitical tensions weighed on markets.

 

Because of the improved inflation outlook over the 12-month period, developed international investments trended higher during the 12 months ended October 31, 2023. We believe that the rising rate environment was beneficial to international value stocks relative to international growth stocks over the 12-month period and the value factor1 was a positive driver of Fund performance during the fiscal year ended October 31, 2023, as international value stocks outperformed international growth stocks2. The size

factor3, however, was a negative driver of Fund performance over the 12 months, as developed market small cap stocks underperformed developed market large cap stocks. Overall, the positive performance derived from the value factor exposures of the Underlying Index offset the negative performance of its size factor, leading to the Underlying Index’s outperformance against the MSCI World ex-USA IMI Index4 by 1.74%. Tracking difference between the Fund’s NAV and the Underlying Index’s total return for the 12-month period was -10 basis points (“bps”)5, which is reflective of the Fund’s management fee (-39 bps), securities lending (+9 bps) and dividend tax differential (+20 bps).

 

The Morningstar Developed Markets ex-US Factor Tilt Index is the intellectual property (including registered trademarks) of Morningstar and/or its licensors (“Licensors”), which is used under license. The securities based on the Index are in no way sponsored, endorsed, sold or promoted by Morningstar and its Licensors and neither of the Licensors shall have any liability with respect thereto.

1 

The Morningstar value factor seeks to identify stocks that are inexpensive relative to some measure of fundamental value (e.g., low price/book, low price/earnings, high dividend yields, etc.), which could result in outperformance relative to those that are pricier.

 

2 

Growth stocks are defined as those issued by companies that are anticipated to grow at a rate significantly above the average for the market.

3 

The Morningstar size factor measures a stock’s total capitalization, which can be found by multiplying the current share price by all the outstanding shares of the stock, and seeks to overweight smaller capitalization stocks.

 

4 

The MSCI World ex-USA Investable Market Index captures large, mid and small cap representation across 22 of 23 Developed Markets (DM) countries - excluding the U.S.

 

5 

A unit that is equal to 1/100th of 1% and is used to denote the change in a financial instrument.

 

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FlexShares® Morningstar®   MANAGEMENT’S DISCUSSION OF FUND PERFORMANCE

Emerging Markets Factor Tilt Index Fund Ticker:  TLTE

 

 

CUMULATIVE PERFORMANCE

Through October 31, 2023

 

LOGO

 

AVERAGE ANNUAL TOTAL RETURN

For the period ended October 31, 2023

 

   

1 Year

   

5 Year

   

10 Year

   

Fund
Inception

9/25/2012

 
 

 

 

 

FlexShares Morningstar Emerging Markets Factor Tilt Index Fund (Based on Net Asset Value)

    13.63     2.51     1.42     1.80

FlexShares Morningstar Emerging Markets Factor Tilt Index Fund (Based on Market Price)

    13.27     2.56     1.35     1.75

Morningstar® Emerging Markets Factor Tilt IndexSM

    14.59     3.36     2.15     2.57

 

All data as of 10/31/23. Total returns based on market price do not include brokerage commissions that may be payable on secondary market transactions. If brokerage commissions were included, these returns would be lower. Total returns based on market price and net asset value (“NAV”) assume that dividends and capital gain distributions have been reinvested in the Fund at market price and NAV, respectively. NAV is calculated by dividing the total value of all the securities in the Fund’s portfolio plus cash, interest and receivables less any liabilities by the number of Fund shares outstanding. Market price is determined by the midpoint of the bid/ask spread at 4:00 p.m. Eastern Time from the primary listing exchange. Market price returns may vary from NAV returns.

 

Performance quoted represents past performance and does not guarantee future results. The graph and table do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption or sale of Fund shares. Unlike the index that the Fund seeks to track, the Fund’s total returns are reduced by operating expenses, such as transaction costs and management fees. An investor cannot invest directly in an index.

 

Performance reflects contractual reimbursements in effect until March 1, 2024. In the absence of such reimbursements, performance would be reduced. The gross expense ratio of the Fund is 0.60% and the net expense ratio is 0.59%. The gross and net expense ratios disclosed are as reported in the Fund’s prospectus, which may differ from the gross and net expense ratios presented in the Fund’s financial reports. Current performance may be higher or lower than performance shown. Investment return and the principal value of an investment will fluctuate. Shares may be worth more or less than original cost when redeemed or sold in the market.

 

FlexShares ETFs’ performance data current to the most recent month-end is available at www.flexshares.com.

 

PORTFOLIO ANALYSIS

 

The Fund seeks to provide investment results that correspond generally to the price and yield performance, before fees and expenses, of the Morningstar® Emerging Markets Factor Tilt IndexSM (the “Underlying Index”). The Underlying Index is designed to reflect the performance of a selection of companies that, in the aggregate, possess greater exposure to size and value factors relative to the Morningstar Emerging Markets Index (the “Parent Index”), a float-adjusted market-capitalization weighted index of companies incorporated in emerging-market countries. The Underlying Index seeks to achieve increased exposures to size and value factors, or a “factor tilt,” by adjusting the Parent Index’s constituent weights to achieve a slightly greater weight on companies with smaller market capitalizations or lower valuations, as determined by Morningstar, Inc., pursuant to its index methodology. The Underlying Index is designed to include companies with enhanced risk-return characteristics relative to the broader emerging equity market by featuring size and value risk premiums, which Northern Trust Investments, Inc. (“NTI”) believes have been historically demonstrated over a full market cycle. As of October 31, 2023, there were 3,701 issues in the Underlying Index. NTI uses a “passive” or indexing approach to try to achieve the Fund’s investment objective. NTI uses a representative sampling strategy to manage the Fund. This means that the Fund invests in a representative sample of securities that collectively has an investment profile similar to the Underlying Index. The Fund reserves the right to invest in substantially all of the securities in its Underlying Index in approximately the same proportions (i.e., replication) if NTI determines that it is in the best interest of the Fund.

 

During the 12 months ending October 31, 2023, prices on emerging market equities generally traded higher. Over the course of the 12-month period the U.S. dollar (USD) declined and positively impacted U.S. investors as returns in international currencies generally were aided by the falling USD.

 

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Table of Contents

 

FlexShares® Morningstar®   MANAGEMENT’S DISCUSSION OF FUND PERFORMANCE

Emerging Markets Factor Tilt Index Fund (cont.)

 

 

PORTFOLIO ANALYSIS (cont.)

 

Through Q4 of 2022, emerging equities traded higher as China relaxed some pandemic-related restrictions, boosting investors’ expectations that increased spending could aid global growth, and that a global recession may be less severe than previously expected. Emerging market equity securities continued to rise in Q1 of 2023, but lagged behind Developed markets as continued monetary tightening across global central banks and increased U.S.China geopolitical tensions weighed on the region. Emerging market equities continued higher in Q2 of 2023, but again trailed Developed equity securities as optimism around China’s reopening was dampened by worse than expected consumer spending. Tensions between the U.S. and China increased as new restrictions around chip manufacturing in both the U.S. and Europe limited Chinese access to these technologies. Emerging equities declined in Q3 of 2023 as weakness in China’s property sector and overall economy negatively impacted global growth. We believe that continued economic strength in the U.S. could result in global interest rates remaining at higher levels for longer than anticipated, also impinging on the growth outlook for emerging markets. Emerging markets continued lower in October of 2023 as slowing global growth, weak energy prices, and increased geopolitical tensions weighed on markets.

 

Investors showed a preference for value companies in emerging markets for the 12 months ending October 31, 2023, resulting in the high value factor1 exposure being a positive driver of Fund performance as emerging market value stocks outperformed emerging market growth stocks.2 In addition, the size factor3 was a positive driver of Fund performance over the 12 months, as emerging market small cap stocks outperformed emerging market large cap stocks. Overall, the positive performance derived from the value and size factor exposures of the Underlying Index was the primary source of the Underlying Index’s outperformance against the MSCI Emerging Markets Investable Market Index (IMI)4 by 2.91%. Tracking difference between the Fund’s NAV and the Underlying Index’s total return for the 12-month period was

-96 basis points (“bps”)5, which is reflective of the Fund’s management fee (-59 bps), stock selection/futures (-19 bps), securities lending (+6 bps) and dividend tax differential (+1 bps), and India Capital Gains Taxes (-25 bps).

 

The Morningstar Emerging Markets Factor Tilt Index is the intellectual property (including registered trademarks) of Morningstar and/or its licensors (“Licensors”), which is used under license. The securities based on the Index are in no way sponsored, endorsed, sold or promoted by Morningstar and its Licensors and neither of the Licensors shall have any liability with respect thereto.

 

1 

The Morningstar value factor seeks to identify stocks that are inexpensive relative to some measure of fundamental value (e.g., low price/book, low price/earnings, high dividend yields, etc.), which could result in outperformance relative to those that are pricier.

 

2 

Growth stocks are defined as those issued by companies that are anticipated to grow at a rate significantly above the average for the market.

 

3 

The Morningstar size factor measures a stock’s total capitalization, which can be found by multiplying the current share price by all the outstanding shares of the stock, and seeks to overweight smaller capitalization stocks.

 

4 

The MSCI Emerging Markets Investable Market Index (IMI) captures large, mid and small cap representation across 24 Emerging Markets (EM) countries.

 

5 

A unit that is equal to 1/100th of 1% and is used to denote the change in a financial instrument.

 

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FlexShares®   MANAGEMENT’S DISCUSSION OF FUND PERFORMANCE

US Quality Large Cap Index Fund Ticker:  QLC

 

 

CUMULATIVE PERFORMANCE

Through October 31, 2023

 

LOGO

 

AVERAGE ANNUAL TOTAL RETURN

For the period ended October 31, 2023

 

    1 Year     3 Year     5 Year     Fund
Inception
9/23/2015
 
 

 

 

 

FlexShares US Quality Large Cap Index Fund Index Fund (Based on Net Asset Value)

    9.54     10.93     8.56     9.71

FlexShares US Quality Large Cap Index Fund Index Fund (Based on Market Price)

    9.47     10.92     8.54     9.71

S&P 500 Index

    10.14     10.36     11.01     12.04

Northern Trust Quality Large Cap IndexSM

    9.89     11.31     8.84     10.04

 

All data as of 10/31/23. Total returns based on market price do not include brokerage commissions that may be payable on secondary market transactions. If brokerage commissions were included, these returns would be lower. Total returns based on market price and net asset value (“NAV”) assume that dividends and capital gain distributions have been reinvested in the Fund at market price and NAV, respectively. NAV is calculated by dividing the total value of all the securities in the Fund’s portfolio plus cash, interest and receivables less any liabilities by the number of Fund shares outstanding. Market price is determined by the midpoint of the bid/ask spread at 4:00 p.m. Eastern Time from the primary listing exchange. Market price returns may vary from NAV returns.

 

Performance quoted represents past performance and does not guarantee future results. The graph and table do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption or sale of Fund shares. Unlike the index that the Fund seeks to track, the Fund’s total returns are reduced by operating expenses, such as transaction costs and management fees. An investor cannot invest directly in an index.

 

Performance reflects contractual reimbursements in effect until March 1, 2024. In the absence of such reimbursements, performance would be reduced. The gross expense ratio of the Fund is 0.26% and the net expense ratio is 0.25%. The gross and net expense ratios disclosed are as reported in the Fund’s prospectus, which may differ from the gross and net expense ratios presented in the Fund’s financial reports. Current performance may be higher or lower than performance shown. Investment return and the principal value of an investment will fluctuate. Shares may be worth more or less than original cost when redeemed or sold in the market.

 

FlexShares ETFs’ performance data current to the most recent month-end is available at www.flexshares.com.

 

PORTFOLIO ANALYSIS

 

The Fund seeks to provide investment results that correspond generally to the price and yield performance, before fees and expenses, of the Northern Trust Quality Large Cap IndexSM (the “Underlying Index”). The Underlying Index is designed to reflect the performance of a selection of companies that, in the aggregate, possess greater exposure to quality, value and momentum factors relative to a universe of publicly traded U.S. large-capitalization equity securities. The universe is comprised of the 600 largest companies in the Northern Trust 1250 Index, a floatadjusted market-capitalization weighted index of U.S. domiciled companies. The Underlying Index is designed to include companies with enhanced risk-return characteristics relative to the broader U.S. large-cap equity market by featuring quality, value and momentum risk premiums, which Northern Trust Investments, Inc. (“NTI”) believes have been historically demonstrated over a full market cycle. As of October 31, 2023, there were 183 issues in the Underlying Index. NTI uses a “passive” or indexing approach to try to achieve the Fund’s investment objective. NTI uses a representative sampling strategy to manage the Fund. This means that the Fund invests in a representative sample of securities that collectively has an investment profile similar to the Underlying Index. The Fund may or may not hold all of the securities that are included in the Underlying Index.

 

During the 12 months ending October 31, 2023, prices on domestic equity securities generally traded higher. Through Q4 of 2022, U.S. equity markets moved modestly lower as inflation remained elevated and the U.S. Federal Reserve (the “Fed”) continued to tighten monetary conditions through rate hikes. U.S. equities rose over the first half of 2023, as investors looked past the collapse of Silicon Valley Bank and the potential of a banking crisis, as inflation declined while Gross Domestic Product (GDP)1 growth was more resilient than expected. The Fed continued to hike interest rates through May 2023, but lowered the magnitude of those hikes to one-quarter percent each before pausing at the June 2023 meeting. Over the first six months of 2023, technology

 

   FLEXSHARES ANNUAL REPORT     15  


Table of Contents

 

FlexShares®   MANAGEMENT’S DISCUSSION OF FUND PERFORMANCE

US Quality Large Cap Index Fund (cont.)

 

 

PORTFOLIO ANALYSIS (cont.)

 

companies led all sectors as artificial intelligence related companies drew interest, with seven large cap growth companies contributing a large portion of equity market gains. Domestic equity securities declined in Q3 of 2023 as inflation increased in July and August of 2023, and the Fed reiterated their outlook of “higher rates for longer” than we believe markets had priced in at the beginning of Q3 of 2023. U.S. equity markets continued to decline in October of 2023 as inflation remained resilient and there were increased concerns of slowing global growth due to weakness in China’s economy.

 

Because of the resiliency of the economic data, the falling inflation environment and the rising rate environment, U.S. domestic investments trended higher during the 12 months ended October 31, 2023; however, a large portion of the overall return for market weighted indices was concentrated in seven mega cap2 growth companies. Because of the outsized performance of these large cap growth names, we believe the value factor3 was a negative driver of Fund performance during the fiscal year ended October 31, 2023, as U.S. value stocks underperformed U.S. growth stocks4. We believe that investors showed a preference for high quality factor5 companies within the large cap universe utilized by the Underlying Index, resulting in the high-quality factor exposure enhancing Fund performance over the 12 months. The momentum factor exposure6 of the Underlying Index was also a positive driver of Fund performance as positive momentum companies outperformed negative momentum companies over the 12 months. Overall, the positive performance from the quality and momentum exposures of the Underlying Index was not enough to offset the negative performance of the value factor of the Underlying Index,

and this was the primary source of the Underlying Index’s underperformance relative to the S&P 500 Index7 by -25 basis points (“bps”)8. Tracking difference between the Fund’s NAV and the Underlying Index’s total return for the 12-month period was -35 bps which is reflective of the management fee (-25 bps), stock selection/futures (-10 bps), securities lending (+1 bps) and performance calculation differences between the Underlying Index and the Fund (-1 bps).

1 

GDP is seen as a comprehensive measure of U.S. economic activity which measures the value of the final goods and services produced in the United States.

 

2 

Size is measured by a stock’s total capitalization which can be found by multiplying the current share price by all the outstanding shares of stock.

 

3 

The value factor is a factor reflecting the current worth of a company relative to its own historical value, book value, or valuation versus peers.

 

4 

Growth stocks are defined as those issued by companies that are anticipated to grow at a rate significantly above the average for the market.

 

 

5 

The quality factor is a factor that seeks to identify companies that exhibit financial strength and stability relative to the market.

 

6 

The momentum factor is a factor that reflects market sentiment and changes in security price over a given time period.

 

7 

The Standard & Poor’s 500 Index is a market-capitalization-weighted index of 500 leading publicly traded companies in the U.S.

 

8 

A unit that is equal to 1/100th of 1% and is used to denote the change in a financial instrument.

 

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FlexShares®   MANAGEMENT’S DISCUSSION OF FUND PERFORMANCE

STOXX US ESG Select Index Fund Ticker:  ESG

 

 

CUMULATIVE PERFORMANCE

Through October 31, 2023

 

LOGO

 

 

AVERAGE ANNUAL TOTAL RETURN

For the period ended October 31, 2023

 

    1 Year     3 Year     5 Year     Fund
Inception
7/13/2016
 
 

 

 

 

FlexShares STOXX® US ESG Select Index Fund
(Based on Net Asset Value)

    11.91     10.43     11.37     12.01

FlexShares STOXX® US ESG Select Index Fund
(Based on Market Price)

    11.87     10.41     11.38     12.01

Russell 1000® Index

    9.48     9.52     10.71     11.31

STOXX® USA ESG Select KPIs IndexSM

    11.83     10.33     11.15     11.57

 

All data as of 10/31/23. Total returns based on market price do not include brokerage commissions that may be payable on secondary market transactions. If brokerage commissions were included, these returns would be lower. Total returns based on market price and net asset value (“NAV”) assume that dividends and capital gain distributions have been reinvested in the Fund at market price and NAV, respectively. NAV is calculated by dividing the total value of all the securities in the Fund’s portfolio plus cash, interest and receivables less any liabilities by the number of Fund shares outstanding. Market price is determined by the midpoint of the bid/ask spread at 4:00 p.m. Eastern Time from the primary listing exchange. Market price returns may vary from NAV returns.

 

Performance quoted represents past performance and does not guarantee future results. The graph and table do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption or sale of Fund shares. Unlike the index that the Fund seeks to track, the Fund’s total returns are reduced by operating expenses, such as transaction costs and management fees. An investor cannot invest directly in an index.

 

Performance reflects contractual reimbursements in effect until March 1, 2024. In the absence of such reimbursements, performance would be reduced. The gross expense ratio of the Fund is 0.33% and the net expense ratio is 0.32%. The gross and net expense ratios disclosed are as reported in the Fund’s prospectus, which may differ from the gross and net expense ratios presented in the Fund’s financial reports. Current performance may be higher or lower than performance shown. Investment return and the principal value of an investment will fluctuate. Shares may be worth more or less than original cost when redeemed or sold in the market.

 

FlexShares ETFs’ performance data current to the most recent month-end is available at www.flexshares.com.

 

PORTFOLIO ANALYSIS

 

The Fund seeks investment results that correspond generally to the price and yield performance, before fees and expenses, of the STOXX® USA ESG Select KPIs IndexSM (“Underlying Index”). The Underlying Index is designed to reflect the performance of a selection of companies that, in the aggregate, score better with respect to a set of environmental, social and governance (“ESG”) key performance indicators relative to the U.S. companies in the STOXX® Global 1800 Index, a float adjusted market-capitalization weighted index of companies incorporated in the U.S. and in developed international markets. As of October 31, 2023, there were 263 issues in the Underlying Index. Northern Trust Investments, Inc. (“NTI”) uses a “passive” or indexing approach to try to achieve the Fund’s investment objective. NTI uses a representative sampling strategy to manage the Fund. This means that the Fund invests in a representative sample of securities that collectively has an investment profile similar to the Underlying Index. The Fund may or may not hold all of the securities that are included in the Underlying Index.

 

During the 12 months ending October 31, 2023, prices on domestic equity securities generally traded higher. Through Q4 of 2022, U.S. equity markets moved modestly lower as inflation remained elevated, and the U.S. Federal Reserve (the “Fed”) continued to tighten monetary conditions through rate hikes. U.S. equities rose over the first half of 2023, as investors looked past the collapse of Silicon Valley Bank and the potential of a banking crisis, as inflation declined while Gross Domestic Product (GDP)1 growth was more resilient than expected. The Fed continued to hike interest rates through the first three meetings of the year, but lowered the magnitude of those hikes to one-quarter percent each before pausing at the June meeting. Over the first six months of 2023, technology companies led all sectors as artificial intelligence related companies drew interest, with seven large cap growth companies contributing a large portion of equity market gains. Domestic equity securities declined in

 

1 

GDP is seen as a comprehensive measure of U.S. economic activity which measures the value of the final goods and services produced in the United States.

 

   FLEXSHARES ANNUAL REPORT     17  


Table of Contents

 

FlexShares®   MANAGEMENT’S DISCUSSION OF FUND PERFORMANCE

STOXX US ESG Select Index Fund (cont.)

 

 

 

 

 

 

PORTFOLIO ANALYSIS (cont.)

 

Q3 of 2023 as inflation increased in July and August of 2023, and the Fed reiterated their outlook of “higher rates for longer” than we believe markets had priced in at the beginning of Q3 of 2023. U.S. equity markets continued to decline in October of 2023 as inflation remained resilient and there were increased concerns of slowing global growth due to weakness in China’s economy.

 

The Underlying Index had a positive total return during the 12 months ended October 31, 2023, and outperformed domestic equity markets, as defined by the Russell 1000® Index2 by 2.35%. The Underlying Index’s ESG-tilted approach led to underweight Fund exposure to the utilities, real estate and industrials sectors, which benefited Fund performance. Likewise, the ESG tilt led to differences in security weights within the communication services, financials and health care sectors that were also positive drivers of Fund performance. Overall, the only sector within the Underlying Index that contributed negatively to relative performance was the energy sector.

 

Tracking difference between the Fund’s NAV and the Underlying Index’s total return for the 12-month period was +8 basis points (“bps”)3, which is reflective of the management fee (-32 bps), stock selection/futures (-7 bps) and dividend tax differential (+47 bps). The STOXX USA ESG Select KPIs Index is the intellectual property (including registered trademarks) of STOXX Limited, Zurich, Switzerland and/or its licensors (“Licensors”), which is used under license. The securities based on the Index are in no way sponsored, endorsed, sold or promoted by STOXX and its Licensors and neither of the Licensors shall have any liability with respect thereto.

 

 

2 

The Russell 1000® Index refers to a stock market index that represents the 1000 top companies in the United States.

 

3 

A unit that is equal to 1/100th of 1% and is used to denote the change in a financial instrument.

 

18    FLEXSHARES ANNUAL REPORT  


Table of Contents

 

FlexShares®   MANAGEMENT’S DISCUSSION OF FUND PERFORMANCE

STOXX® Global ESG Select Index Fund Ticker:  ESGG

 

 

CUMULATIVE PERFORMANCE

Through October 31, 2023

 

LOGO

 

AVERAGE ANNUAL TOTAL RETURN

For the period ended October 31, 2023

 

    1 Year     3 Year     5 Year     Fund
Inception
7/13/2016
 
 

 

 

 

FlexShares STOXX® Global ESG Select Index Fund
(Based on Net Asset Value)

    14.17     9.38     9.50     10.00

FlexShares STOXX® Global ESG Select Index Fund
(Based on Market Price)

    14.52     9.33     9.46     10.04

MSCI World Index

    10.48     8.14     8.27     8.82

STOXX® Global ESG Select KPIs IndexSM

    14.30     9.47     9.56     10.03

 

All data as of 10/31/23. Total returns based on market price do not include brokerage commissions that may be payable on secondary market transactions. If brokerage commissions were included, these returns would be lower. Total returns based on market price and net asset value (“NAV”) assume that dividends and capital gain distributions have been reinvested in the Fund at market price and NAV, respectively. NAV is calculated by dividing the total value of all the securities in the Fund’s portfolio plus cash, interest and receivables less any liabilities by the number of Fund shares outstanding. Market price is determined by the midpoint of the bid/ask spread at 4:00 p.m. Eastern Time from the primary listing exchange. Market price returns may vary from NAV returns.

 

Performance quoted represents past performance and does not guarantee future results. The graph and table do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption or sale of Fund shares. Unlike the index that the Fund seeks to track, the Fund’s total returns are reduced by operating expenses, such as transaction costs and management fees. An investor cannot invest directly in an index.

 

Performance reflects contractual reimbursements in effect until March 1, 2024. In the absence of such reimbursements, performance would be reduced. The gross expense ratio of the Fund is 0.43% and the net expense ratio is 0.42%. The gross and net expense ratios disclosed are as reported in the Fund’s prospectus, which may differ from the gross and net expense ratios presented in the Fund’s financial reports. Current performance may be higher or lower than performance shown. Investment return and the principal value of an investment will fluctuate. Shares may be worth more or less than original cost when redeemed or sold in the market.

 

FlexShares ETFs’ performance data current to the most recent month-end is available at www.flexshares.com.

 

PORTFOLIO ANALYSIS

 

The Fund seeks investment results that correspond generally to the price and yield performance, before fees and expenses, of the STOXX® Global ESG Select KPIs IndexSM (the “Underlying Index”). The Underlying Index is designed to reflect the performance of a selection of companies that, in the aggregate, score better with respect to a set of environmental, social and governance (“ESG”) key performance indicators relative to the STOXX® Global 1800 Index, a float-adjusted market-capitalization weighted index of companies incorporated in the U.S. and in developed international markets. As of October 31, 2023, there were 865 issues in the Underlying Index. Northern Trust Investments, Inc. (“NTI”) uses a “passive” or indexing approach to try to achieve the Fund’s investment objective. NTI uses a representative sampling strategy to manage the Fund. This means that the Fund invests in a representative sample of securities that collectively has an investment profile similar to the Underlying Index. The Fund may or may not hold all of the securities that are included in the Underlying Index.

 

During the 12 months ending October 31, 2023, prices on global equity securities generally traded higher. Through Q4 of 2022 global markets rose as falling inflation and the anticipated boost to global growth resulting from the re-opening of China’s economy all supported equity securities prices. Global equities continued higher over the first half of 2023, as investors looked past concerns in the banking sector to falling energy prices, lower inflation, and global growth was more resilient than expected. Over the first six months of 2023, technology companies led all sectors as artificial intelligence related companies drew interest, with seven U.S. large cap growth companies contributing a large portion of equity market gains. Global equities declined in Q3 of 2023 as higher energy prices, consumer spending concerns in China, and the U.S. Federal Reserve’s outlook of “higher rates for longer” weighed on investors’ global growth outlook. Global equities continued lower in October of 2023 as slowing global growth concerns and increased geopolitical tensions weighed on markets.

 

The Underlying Index had a positive total return during the 12 months ended

 

   FLEXSHARES ANNUAL REPORT     19  


Table of Contents

 

FlexShares®   MANAGEMENT’S DISCUSSION OF FUND PERFORMANCE

STOXX® Global ESG Select Index Fund (cont.)

 

 

 

 

 

 

PORTFOLIO ANALYSIS (cont.)

 

October 31, 2023, and outperformed global equity markets, as defined by the MSCI World Index1, by 3.82%. The Underlying Index’s ESG-tilted approach led to underweights to the utilities and real estate sectors as well as overweights to the technology and energy sectors that benefited Fund performance. The ESG tilt also led to overweights to the healthcare and energy sectors as well as an underweight to the communication services sector that detracted from performance. Likewise, the ESG tilt led to differences in security weights within the communication services, financials and industrials sectors that were positive drivers of Fund performance as well as security selections within the technology and energy sectors that detracted from performance. Tracking difference between the Fund’s NAV and the Underlying Index’s total return for the 12-month period was -13 basis points (“bps”)2, which is reflective of the management fee (-42 bps), stock selection/futures (-10 bps), securities lending (+1 bps), and dividend tax differential (+38 bps).

 

The STOXX Global ESG Select KPIs Index is the intellectual property (including registered trademarks) of STOXX Limited, Zurich, Switzerland and/or its licensors (“Licensors”), which is used under license. The securities based on the Index are in no way sponsored, endorsed, sold or promoted by STOXX and its Licensors and neither of the Licensors shall have any liability with respect thereto.

 

1 

The MSCI World Index captures large and mid-cap representation across 23 Developed Markets countries.

 

2 

A unit that is equal to 1/100th of 1% and is used to denote the change in a financial instrument.

 

20    FLEXSHARES ANNUAL REPORT  


Table of Contents

 

FlexShares® ESG & Climate   MANAGEMENT’S DISCUSSION OF FUND PERFORMANCE

US Large Cap Core Index Fund Ticker:  FEUS

 

 

CUMULATIVE PERFORMANCE

Through October 31, 2023

 

LOGO

 

AVERAGE ANNUAL TOTAL RETURN

For the period ended October 31, 2023

 

    1 Year     Fund
Inception
9/20/2021
 
 

 

 

 

FlexShares ESG & Climate US Large Cap Core Index Fund (Based on Net Asset Value)

    9.33     -0.97

FlexShares ESG & Climate US Large Cap Core Index Fund (Based on Market Price)

    9.29     -0.99

S&P 500 Index

    10.14     -0.23

Northern Trust ESG & Climate US Large Cap Core IndexSM

    9.47     -0.88

 

All data as of 10/31/23. Total returns based on market price do not include brokerage commissions that may be payable on secondary market transactions. If brokerage commissions were included, these returns would be lower. Total returns based on market price and net asset value (“NAV”) assume that dividends and capital gain distributions have been reinvested in the Fund at market price and NAV, respectively. NAV is calculated by dividing the total value of all the securities in the Fund’s portfolio plus cash, interest and receivables less any liabilities by the number of Fund shares outstanding. Market price is determined by the midpoint of the bid/ask spread at 4:00 p.m. Eastern Time from the primary listing exchange. Market price returns may vary from NAV returns.

 

Performance quoted represents past performance and does not guarantee future results. The graph and table do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption or sale of Fund shares. Unlike the index that the Fund seeks to track, the Fund’s total returns are reduced by operating expenses, such as transaction costs and management fees. An investor cannot invest directly in an index.

 

Performance reflects contractual reimbursements in effect until March 1, 2024. In the absence of such reimbursements, performance would be reduced. The gross expense ratio of the Fund is 0.10% and the net expense ratio is 0.09%. The gross and net expense ratios disclosed are as reported in the Fund’s prospectus, which may differ from the gross and net expense ratios presented in the Fund’s financial reports. Current performance may be higher or lower than performance shown. Investment return and the principal value of an investment will fluctuate. Shares may be worth more or less than original cost when redeemed or sold in the market.

 

FlexShares ETFs’ performance data current to the most recent month-end is available at www.flexshares.com.

 

PORTFOLIO ANALYSIS

 

The Fund seeks investment results that correspond generally to the price and yield performance, before fees and expenses, of the Northern Trust ESG & Climate US Large Cap Core IndexSM (the “Underlying Index”). The Underlying Index is designed to reflect the performance of a selection of companies that exhibit certain environmental, social and governance (“ESG”) characteristics, while also seeking to provide broad-market, core exposure to publicly traded U.S. large capitalization equity securities, i.e., the 600 largest companies in the Northern Trust 1250 IndexSM (the “Starting Universe”), as measured by largest float adjusted market capitalization. The Underlying Index is designed to minimize tracking differences relative to the Starting Universe, while also seeking (a) an aggregate higher scoring of certain ESG characteristics, as measured by the Northern Trust ESG Vector Score, and (b) reduction of aggregate climate-related risk, as measured by certain carbon-related risk metrics, each relative to the Starting Universe. As of October 31, 2023, there were 166 issues in the Underlying Index. Northern Trust Investments, Inc. (“NTI”) uses a “passive” or indexing approach to try to achieve the Fund’s investment objective. NTI uses a representative sampling strategy to manage the Fund. This means that the Fund invests in a representative sample of securities that collectively has an investment profile similar to the Underlying Index. The Fund may or may not hold all of the securities that are included in the Underlying Index.

 

During the 12 months ending October 31, 2023, prices on domestic equity securities generally traded higher. Through Q4 of 2022 U.S. equity markets moved modestly lower as inflation remained elevated, and the U.S. Federal Reserve (the “Fed”) continued to tighten monetary conditions through rate hikes. U.S. equities rose over the first half of 2023, as investors looked past the collapse of Silicon Valley Bank and the potential of a banking crisis, as inflation declined while Gross Domestic Product (GDP)1 growth was more resilient than expected. The Fed con-

 

1 

GDP is seen as a comprehensive measure of U.S. economic activity which measures the value of the final goods and services produced in the United States.

 

   FLEXSHARES ANNUAL REPORT     21  


Table of Contents

 

FlexShares® ESG & Climate   MANAGEMENT’S DISCUSSION OF FUND PERFORMANCE

US Large Cap Core Index Fund (cont.)

 

 

 

 

 

 

PORTFOLIO ANALYSIS (cont.)

 

tinued to hike interest rates through the first three meetings of the year, but lowered the magnitude of those hikes to one-quarter percent each before pausing at the June meeting. Over the first six months of 2023, technology companies led all sectors as artificial intelligence related companies drew interest, with seven large cap growth companies contributing a large portion of equity market gains. Domestic equity securities declined in Q3 of 2023, as inflation increased in July and August of 2023, and the Fed reiterated their outlook of “higher rates for longer” than we believe markets had priced in at the beginning of Q3 of 2023. U.S. equity markets continued to decline in October of 2023, as inflation remained resilient and there were increased concerns of slowing global growth due to weakness in China’s economy.

 

The Underlying Index had a positive total return during the 12 months ended October 31, 2023, and underperformed the U.S. large cap equity market, as defined by the S&P 500 Index2 by -0.67%. The Underlying Index’s Climate and ESG focused approach led to differences in security weights within the healthcare, industrials, communication services and consumer staples sectors that negatively impacted performance. Overall, it was the differences in these sectors that were the primary source of the Underlying Index’s underperformance. Tracking difference between the Fund’s NAV and the Underlying Index’s total return for the 12-month period was - 14 basis point (“bps”)3, which is reflective of the management fee (-9 bps), stock selection/futures (-4 bps), and compounding of tracking error over time (-1 bps).

 

2 

The S&P 500 Index is a market-capitalization-weighted index of 500 leading publicly traded companies in the U.S.

 

3 

A unit that is equal to 1/100th of 1% and is used to denote the change in a financial instrument.

 

22    FLEXSHARES ANNUAL REPORT  


Table of Contents

 

FlexShares® ESG & Climate   MANAGEMENT’S DISCUSSION OF FUND PERFORMANCE

Developed Markets ex-US Core Index Fund Ticker:  FEDM

 

 

CUMULATIVE PERFORMANCE

Through October 31, 2023

 

LOGO

 

 

AVERAGE ANNUAL TOTAL RETURN

For the period ended October 31, 2023

 

    1 Year    

Fund

Inception

9/20/2021

 
 

 

 

 

FlexShares ESG & Climate Developed Markets Ex-US Core Index Fund (Based on Net Asset Value)

    12.08     -5.90

FlexShares ESG & Climate Developed Markets Ex-US Core Index Fund (Based on Market Price)

    12.80     -5.49

MSCI World ex-US Index

    12.56     -5.22

Northern Trust ESG & Climate Developed Markets ex-US Core IndexSM

    12.21     -5.93

 

All data as of 10/31/23. Total returns based on market price do not include brokerage commissions that may be payable on secondary market transactions. If brokerage commissions were included, these returns would be lower. Total returns based on market price and net asset value (“NAV”) assume that dividends and capital gain distributions have been reinvested in the Fund at market price and NAV, respectively. NAV is calculated by dividing the total value of all the securities in the Fund’s portfolio plus cash, interest and receivables less any liabilities by the number of Fund shares outstanding. Market price is determined by the midpoint of the bid/ask spread at 4:00 p.m. Eastern Time from the primary listing exchange. Market price returns may vary from NAV returns.

 

Performance quoted represents past performance and does not guarantee future results. The graph and table do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption or sale of Fund shares. Unlike the index that the Fund seeks to track, the Fund’s total returns are reduced by operating expenses, such as transaction costs and management fees. An investor cannot invest directly in an index.

 

Performance reflects contractual reimbursements in effect until March 1, 2024. In the absence of such reimbursements, performance would be reduced. The gross expense ratio of the Fund is 0.13% and the net expense ratio is 0.12%. The gross and net expense ratios disclosed are as reported in the Fund’s prospectus, which may differ from the gross and net expense ratios presented in the Fund’s financial reports. Current performance may be higher or lower than performance shown. Investment return and the principal value of an investment will fluctuate. Shares may be worth more or less than original cost when redeemed or sold in the market.

 

FlexShares ETFs’ performance data current to the most recent month-end is available at www.flexshares.com.

 

PORTFOLIO ANALYSIS

 

The Fund seeks investment results that correspond generally to the price and yield performance, before fees and expenses, of the Northern Trust ESG & Climate Developed Markets ex-US Core IndexSM (the “Underlying Index”). The Underlying Index is designed to reflect the performance of a selection of companies that exhibit certain environmental, social and governance (“ESG”) characteristics, while also seeking to provide broad-market, core exposure to publicly traded equity securities issued by companies domiciled in developed market countries, excluding the U.S. The Underlying Index is designed to minimize tracking differences relative to the Northern Trust Developed Markets ex-US Large Cap IndexSM (the “Parent Index”), while also seeking (a) an aggregate higher scoring of certain ESG characteristics, as measured by the Northern Trust ESG Vector Score, and (b) reduction of aggregate climate-related risk, as measured by certain carbon-related risk metrics, each relative to the Parent Index. As of October 31, 2023, there were 281 issues in the Underlying Index. Northern Trust Investments, Inc. (“NTI”) uses a “passive” or indexing approach to try to achieve the Fund’s investment objective. NTI uses a representative sampling strategy to manage the Fund. This means that the Fund invests in a representative sample of securities that collectively has an investment profile similar to the Underlying Index. The Fund may or may not hold all of the securities that are included in the Underlying Index.

 

During the 12 months ending October 31, 2023, prices on developed international equity securities generally traded higher. Over the course of the 12-month period the U.S. dollar (USD) declined and positively impacted U.S. investors as returns in international currencies generally were aided by the falling USD. Through Q4 of 2022, developed international markets rose as falling inflation in Europe, a stabilized fiscal environment in the United Kingdom, and the anticipated boost to global growth resulting from the re-opening of China’s economy all supported equity security prices. Developed international equities continued higher in Q1 of 2023, as investors looked past concerns in the banking sector to falling energy prices, lower inflation in Europe,

 

   FLEXSHARES ANNUAL REPORT     23  


Table of Contents

 

FlexShares® ESG & Climate   MANAGEMENT’S DISCUSSION OF FUND PERFORMANCE

Developed Markets ex-US Core Index Fund (cont.)

 

 

 

 

 

 

 

PORTFOLIO ANALYSIS (cont.)

 

and strength in the technology and consumer discretionary sectors. Developed international equity securities continued higher in Q2 of 2023, but, in the aggregate, lagged U.S. equity markets as regional performance varied greatly between different markets. Japanese equity markets moved higher on the back of corporate governance reform, while Eurozone equities benefited from technology and semiconductor companies connected to artificial intelligence. Equity markets in the United Kingdom traded lower in local currency terms, but were positive in USD terms as falling energy prices and monetary tightening by the Bank of England impacted equities. Asia Pacific equity markets excluding Japan were lower as concerns over growth in China due to weak consumer spending, as well as increased geopolitical tensions between the U.S. and China impact the region. Developed international equities declined in Q3 of 2023, as higher energy prices and concerns on consumer spending in China and Europe weighed on investors’ global growth outlook. Developed equities continued lower in October of 2023 as slowing global growth and increased geopolitical tensions weighed on markets.

 

The Underlying Index had a positive total return during the 12 months ended October 31, 2023, and underperformed the developed international equity market, as defined by the MSCI World ex-US Index1 by -0.35%. The Underlying Index’s Climate and ESG focused approach led to differences in security weights within the utilities, financials and consumer discretionary sectors that negatively impacted performance. Overall, it was the differences in these sectors that were the primary source of the Underlying Index’s underperformance. Tracking difference between the Fund’s NAV and the Underlying Index’s total return for the 12-month period was -13 basis points (“bps”)2, which is reflective of the management fee (-12 bps), stock selection/futures (-5 bps), and dividend tax differential (+4 bps).

 

1

The MSCI World ex USA Index captures large and mid cap representation across 22 of 23 Developed Markets (DM) countries – excluding the United States.

 

2

A unit that is equal to 1/100th of 1% and is used to denote the change in a financial instrument.

 

24    FLEXSHARES ANNUAL REPORT  


Table of Contents

 

FlexShares® ESG & Climate   MANAGEMENT’S DISCUSSION OF FUND PERFORMANCE

Emerging Markets Core Index Fund              Ticker:  FEEM

 

 

CUMULATIVE PERFORMANCE

Through October 31, 2023

 

LOGO

 

AVERAGE ANNUAL TOTAL RETURN

For the period ended October 31, 2023

 

   

1 Year

   

Fund

Inception
4/20/2022

 
 

 

 

   

 

 

 

FlexShares ESG & Climate Emerging Markets Core Index Fund
(Based on Net Asset Value)

    11.14     -8.50

FlexShares ESG & Climate Emerging Markets Core Index Fund
(Based on Market Price)

    10.98     -8.23

MSCI Emerging Markets Index

    10.80     -8.38

Northern Trust ESG & Climate Emerging Markets Core IndexSM

    11.79     -8.30

 

All data as of 10/31/23. Total returns based on market price do not include brokerage commissions that may be payable on secondary market transactions. If brokerage commissions were included, these returns would be lower. Total returns based on market price and net asset value (“NAV”) assume that dividends and capital gain distributions have been reinvested in the Fund at market price and NAV, respectively. NAV is calculated by dividing the total value of all the securities in the Fund’s portfolio plus cash, interest and receivables less any liabilities by the number of Fund shares outstanding. Market price is determined by the midpoint of the bid/ask spread at 4:00 p.m. Eastern Time from the primary listing exchange. Market price returns may vary from NAV returns.

 

Performance quoted represents past performance and does not guarantee future results. The graph and table do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption or sale of Fund shares. Unlike the index that the Fund seeks to track, the Fund’s total returns are reduced by operating expenses, such as transaction costs and management fees. An investor cannot invest directly in an index.

 

Performance reflects contractual reimbursements in effect until March 1, 2024. In the absence of such reimbursements, performance would be reduced. The gross expense ratio of the Fund is 0.19% and the net expense ratio is 0.18%. The gross and net expense ratios disclosed are as reported in the Fund’s prospectus, which may differ from the gross and net expense ratios presented in the Fund’s financial reports. Current performance may be higher or lower than performance shown. Investment return and the principal value of an investment will fluctuate. Shares may be worth more or less than original cost when redeemed or sold in the market.

 

FlexShares ETFs’ performance data current to the most recent month-end is available at www.flexshares.com.

 

PORTFOLIO ANALYSIS

 

The Fund seeks investment results that correspond generally to the price and yield performance, before fees and expenses, of the Northern Trust ESG & Climate Emerging Markets Core IndexSM (the “Underlying Index”) The Underlying Index is designed to reflect the performance of a selection of companies that exhibit certain environmental, social and governance (“ESG”) characteristics, while also seeking to provide broad-market, core exposure to publicly traded equity securities issued by companies domiciled in emerging market countries. The Underlying Index is designed to minimize tracking differences relative to the Northern Trust Emerging Markets Large Cap IndexSM (the “Parent Index”), while also seeking (a) an aggregate higher scoring of certain ESG characteristics, as measured by the Northern Trust ESG Vector Score, and (b) reduction of aggregate climate-related risk, as measured by certain carbon-related risk metrics, each relative to the Parent Index. As of October 31, 2023, there were 265 issues in the Underlying Index. Northern Trust Investments, Inc. (“NTI”) uses a “passive” or indexing approach to try to achieve the Fund’s investment objective. NTI uses a representative sampling strategy to manage the Fund. This means that the Fund invests in a representative sample of securities that collectively has an investment profile similar to the Underlying Index. The Fund may or may not hold all of the securities that are included in the Underlying Index.

 

During the 12 months ending October 31, 2023, prices on emerging market equities generally traded higher. Over the course of the 12-month period the U.S. dollar (USD) declined and positively impacted U.S. investors as returns in international currencies generally were aided by the falling USD. Through Q4 of 2022, emerging equities traded higher as China relaxed some pandemic-related restrictions, boosting investors’ expectations that increased spending could aid global growth, and that a global recession may be less severe than previously expected. Emerging market equity securities continued to rise in Q1 of 2023, but lagged behind developed markets as continued monetary tightening across global central banks and increased U.S.China geopolitical

 

   FLEXSHARES ANNUAL REPORT     25  


Table of Contents

 

FlexShares® ESG & Climate   MANAGEMENT’S DISCUSSION OF FUND PERFORMANCE

Emerging Markets Core Index Fund (cont.)

 

 

 

 

 

 

PORTFOLIO ANALYSIS (cont.)

 

tensions weighed on the region. Emerging market equities continued higher in Q2 of 2023, but again trailed developed equity securities as optimism around China’s reopening was dampened by worse than expected consumer spending. Tensions between the U.S. and China increased as new restrictions around chip manufacturing in both the U.S. and Europe limited Chinese access to these technologies. Emerging equities declined in Q3 of 2023, as weakness in China’s property sector and overall economy negatively impacted global growth. We believe continued economic strength in the U.S. could result in global interest rates remaining at higher levels for longer than anticipated, also impinging on the growth outlook for emerging markets. Emerging markets continued lower in October of 2023 as slowing global growth, weak energy prices and increased geopolitical tensions weighed on markets.

 

The Underlying Index had a positive total return during the 12 months ended October 31, 2023, and outperformed the emerging equity market, as defined by the MSCI Emerging Markets Index1 by 0.99% The Underlying Index’s Climate and ESG focused approach led to differences in security weights within the financials, consumer discretionary and materials sectors that positively impacted performance. Overall, it was the differences in these sectors that were the primary source of the Underlying Index’s outperformance. Tracking difference between the Fund’s NAV and the Underlying Index’s total return for the 12-month period was -65 basis points (“bps”)2, which is reflective of the management fee (-18 bps), stock selection/futures (-45 bps), dividend tax differential (-1 bps), and India Capital Gains Taxes (-1 bps).

 

1

The MSCI Emerging Markets Index is a selection of stocks that are designed to track the financial performance of key companies in fast-growing nations.

 

2

A unit that is equal to 1/100th of 1% and is used to denote the change in a financial instrument.

 

26    FLEXSHARES ANNUAL REPORT  


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FlexShares®  Morningstar®   MANAGEMENT’S DISCUSSION OF FUND PERFORMANCE

Global Upstream Natural Resources Index Fund  Ticker:   GUNR

 

 

CUMULATIVE PERFORMANCE

Through October 31, 2023

 

LOGO

 

AVERAGE ANNUAL TOTAL RETURN

For the period ended October 31, 2023

 

    1 Year     5 Year     10 Year     Fund
Inception
9/16/2011
 
 

 

 

 

FlexShares Morningstar Global Upstream Natural Resources Index Fund (Based on Net Asset Value)

    -3.92     7.97     4.50     3.73

FlexShares Morningstar Global Upstream Natural Resources Index Fund (Based on Market Price)

    -3.96     7.99     4.49     3.74

Morningstar® Global Upstream Natural Resources IndexSM

    -3.32     8.57     5.02     4.18

 

All data as of 10/31/23. Total returns based on market price do not include brokerage commissions that may be payable on secondary market transactions. If brokerage commissions were included, these returns would be lower. Total returns based on market price and net asset value (“NAV”) assume that dividends and capital gain distributions have been reinvested in the Fund at market price and NAV, respectively. NAV is calculated by dividing the total value of all the securities in the Fund’s portfolio plus cash, interest and receivables less any liabilities by the number of Fund shares outstanding. Market price is determined by the midpoint of the bid/ask spread at 4:00 p.m. Eastern Time from the primary listing exchange. Market price returns may vary from NAV returns.

 

Performance quoted represents past performance and does not guarantee future results. The graph and table do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption or sale of Fund shares. Unlike the index that the Fund seeks to track, the Fund’s total returns are reduced by operating expenses, such as transaction costs and management fees. An investor cannot invest directly in an index.

 

Performance reflects contractual reimbursements in effect until March 1, 2024. In the absence of such reimbursements, performance would be reduced. The gross expense ratio of the Fund is 0.47% and the net expense ratio is 0.46%. The gross and net expense ratios disclosed are as reported in the Fund’s prospectus, which may differ from the gross and net expense ratios presented in the Fund’s financial reports. Current performance may be higher or lower than performance shown. Investment return and the principal value of an investment will fluctuate. Shares may be worth more or less than original cost when redeemed or sold in the market.

 

FlexShares ETFs’ performance data current to the most recent month-end is available at www.flexshares.com.

 

PORTFOLIO ANALYSIS

 

The Fund seeks investment results that correspond generally to the price and yield performance, before fees and expenses, of the Morningstar Global Upstream Natural Resources IndexSM (the “Underlying Index”). The Underlying Index reflects the performance of a selection of equity securities that are traded in or are issued by companies classified as developed or emerging markets (including the U.S.), as determined by Morningstar, Inc., the index provider, pursuant to its index methodology. To be eligible for inclusion in the Underlying Index, a security must be issued by a company that has significant economic interests in one of the following natural resource categories: energy, agriculture, precious or industrial metals, timber or water, as determined by the Index Provider pursuant to its index methodology (collectively, the “Natural Resources sector”). As of October 31, 2023, there were 120 issues in the Underlying Index. Northern Trust Investments, Inc. (“NTI”) uses a “passive” or indexing approach to try to achieve the Fund’s investment objective and a representative sampling strategy to manage the Fund. This means that the Fund invests in a representative sample of securities that collectively has an investment profile similar to the Underlying Index. The Fund may or may not hold all of the securities that are included in the Underlying Index.

 

During the 12 months ending October 31, 2023, prices on global equity securities generally traded higher. Through Q4 of 2022 global markets rose as falling inflation and the anticipated boost to global growth resulting from the re-opening of China’s economy all supported equity security prices. Global equities continued higher over the first half of 2023, as investors looked past concerns in the banking sector to falling energy prices, lower inflation and global growth was more resilient than expected. Over the first six months of 2023, technology companies led all sectors as artificial intelligence related companies drew interest, with seven U.S. large cap growth companies contributing a large portion of equity market gains. Global equities declined in Q3 of 2023 as higher energy prices, consumer spending concerns in China, and the U.S. Federal Reserve’s outlook of “higher rates for longer” weighed on

 

   FLEXSHARES ANNUAL REPORT     27  


Table of Contents

 

FlexShares® Morningstar®   MANAGEMENT’S DISCUSSION OF FUND PERFORMANCE

Global Upstream Natural Resources Index Fund (cont.)

 

 

 

 

 

 

PORTFOLIO ANALYSIS (cont.)

 

investors’ global growth outlook. Global equities continued lower in October of 2023, as slowing global growth concerns and increased geopolitical tensions weighed on markets.

 

For the 12-month period ended October 31, 2023, the Underlying Index underperformed the global natural resource equity markets, as defined by the S&P Global Natural Resources Index1, by -4.28%. Due to the Underlying Index’s focus on the upstream section of the natural resource supply chain, security selection in Energy and Metals detracted from performance. Sector allocation within Agriculture and Metals also detracted from performance versus the benchmark. The Water Resources sector was a drag on performance, as higher interest rates negatively impacted returns due to the capital intensive nature of the sector. Relative performance in Timber did not aid or detract from the Underlying Index’s relative performance, as negative performance attributed to allocation was offset by positive security selection within the sector. Tracking difference for the period between the Fund’s NAV and the Underlying Index was -60 basis points (bps)2, which is reflective of the Fund’s management fee (-46 bps), stock selection/futures (-20 bps), securities lending (+3 bps), and dividend tax differential (+3 bps).

 

The Morningstar Global Upstream Natural Resources Index is the intellectual property (including registered trademarks) of Morningstar and/or its licensors (“Licensors”), which is used under license. The securities based on the Index are in no way sponsored, endorsed, sold or promoted by Morningstar and its Licensors and neither of the Licensors shall have any liability with respect thereto.

 

 

1

The S&P Global Natural Resources Index includes 90 of the largest publicly-traded companies in natural resources and commodities businesses that meet specific investability requirements, offering investors diversified and investable equity exposure across 3 primary commodityrelated sectors: agribusiness, energy, and metals & mining.

 

2 

A unit that is equal to 1/100th of 1% and is used to denote the change in a financial instrument.

 

28    FLEXSHARES ANNUAL REPORT  


Table of Contents

 

FlexShares® STOXX   MANAGEMENT’S DISCUSSION OF FUND PERFORMANCE

Global Broad Infrastructure Index Fund Ticker:  NFRA

 

 

CUMULATIVE PERFORMANCE

Through October 31, 2023

 

LOGO

 

AVERAGE ANNUAL TOTAL RETURN

For the period ended October 31, 2023

 

    1 Year     5 Year     10 Year     Fund
Inception
10/8/2013
 
 

 

 

 

FlexShares STOXX® Global Broad Infrastructure Index Fund (Based on Net Asset Value)

    1.24     3.71     4.05     4.44

FlexShares STOXX® Global Broad Infrastructure Index Fund (Based on Market Price)

    1.41     3.84     4.06     4.46

STOXX® Global Broad Infrastructure Index

    1.10     3.59     3.95     4.34

 

All data as of 10/31/23. Total returns based on market price do not include brokerage commissions that may be payable on secondary market transactions. If brokerage commissions were included, these returns would be lower. Total returns based on market price and net asset value (“NAV”) assume that dividends and capital gain distributions have been reinvested in the Fund at market price and NAV, respectively. NAV is calculated by dividing the total value of all the securities in the Fund’s portfolio plus cash, interest and receivables less any liabilities by the number of Fund shares outstanding. Market price is determined by the midpoint of the bid/ask spread at 4:00 p.m. Eastern Time from the primary listing exchange. Market price returns may vary from NAV returns.

 

Performance quoted represents past performance and does not guarantee future results. The graph and table do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption or sale of Fund shares. Unlike the index that the Fund seeks to track, the Fund’s total returns are reduced by operating expenses, such as transaction costs and management fees. An investor cannot invest directly in an index.

 

Performance reflects contractual reimbursements in effect until March 1, 2024. In the absence of such reimbursements, performance would be reduced. The gross expense ratio of the Fund is 0.48% and the net expense ratio is 0.47%. The gross and net expense ratios disclosed are as reported in the Fund’s prospectus, which may differ from the gross and net expense ratios presented in the Fund’s financial reports. Current performance may be higher or lower than performance shown. Investment return and the principal value of an investment will fluctuate. Shares may be worth more or less than original cost when redeemed or sold in the market.

 

FlexShares ETFs’ performance data current to the most recent month-end is available at www.flexshares.com.

 

PORTFOLIO ANALYSIS

 

The Fund seeks investment results that correspond generally to the price and yield performance, before fees and expenses, of the STOXX® Global Broad Infrastructure Index (the “Underlying Index”). The Underlying Index is designed to reflect the performance of a selection of companies that, in the aggregate, offer broad exposure to publicly traded developed- and emerging-market infrastructure companies, including U.S. companies, as defined by STOXX Ltd. (“STOXX”) pursuant to its index methodology. As of October 31, 2023, there were 172 issues in the Underlying Index. Northern Trust Investments, Inc. (“NTI”) uses a “passive” or indexing approach to try to achieve the Fund’s investment objective. NTI uses a representative sampling strategy to manage the Fund. This means that the Fund invests in a representative sample of securities that collectively has an investment profile similar to the Underlying Index. The Fund may or may not hold all of the securities that are included in the Underlying Index.

 

During the 12 months ending October 31, 2023, prices on global equity securities generally traded higher. Through Q4 of 2022 global markets rose as falling inflation and the anticipated boost to global growth resulting from the re-opening of China’s economy all supported equity security prices. Global equities continued higher over the first half of 2023, as investors looked past concerns in the banking sector to falling energy prices, lower inflation and global growth was more resilient than expected. Over the first six months of 2023, technology companies led all sectors as artificial intelligence related companies drew interest, with seven U.S. large cap growth companies contributing a large portion of equity market gains. Global equities declined in Q3 of 2023, as higher energy prices, consumer spending concerns in China, and the U.S. Federal Reserve’s outlook of “higher rates for longer” weighed on investors’ global growth outlook. Global equities continued lower in October of 2023, as slowing global growth concerns and increased geopolitical tensions weighed on markets.

 

   FLEXSHARES ANNUAL REPORT     29  


Table of Contents

 

FlexShares® STOXX   MANAGEMENT’S DISCUSSION OF FUND PERFORMANCE

Global Broad Infrastructure Index Fund (cont.)

 

 

 

 

 

 

PORTFOLIO ANALYSIS (cont.)

 

The Underlying Index had a positive total return during the 12 months ended October 31, 2023, and outperformed the global infrastructure market, as defined by the S&P Global Infrastructure Index1, by 3.33%. The Underlying Index’s exposures to the communication, energy, utilities and social infrastructure sectors positively benefited Fund performance, while exposure to transportation infrastructure negatively contributed to Fund performance. The tracking difference between the Fund’s NAV and the Underlying Index’s total return for the 12-month period was +14 basis points (“bps”)2, which is reflective of the Fund’s management fee (-47 bps), stock selection/futures (+2 bps), securities lending (+4 bps), dividend tax differential (+54 bps), and India Capital Gain taxes (+1 bps).

 

The STOXX Global Infrastructure Index is the intellectual property (including registered trademarks) of STOXX Limited, Zurich, Switzerland and/or its licensors (“Licensors”), which is used under license. The securities based on the Index are in no way sponsored, endorsed, sold or promoted by STOXX and its Licensors and neither of the Licensors shall have any liability with respect thereto.

 

1

The S&P Global Infrastructure Index is designed to track 75 companies from around the world chosen to represent the listed infrastructure industry while maintaining liquidity and tradability.

 

2 

A unit that is equal to 1/100th of 1% and is used to denote the change in a financial instrument.

 

30    FLEXSHARES ANNUAL REPORT  


Table of Contents

 

FlexShares®   MANAGEMENT’S DISCUSSION OF FUND PERFORMANCE

Global Quality Real Estate Index Fund Ticker:  GQRE

 

 

CUMULATIVE PERFORMANCE

Through October 31, 2023

 

LOGO

 

AVERAGE ANNUAL TOTAL RETURN

For the period ended October 31, 2023

 

    1 Year     3 Year     5 Year     Fund
Inception
11/5/2013
 
 

 

 

 

FlexShares Global Quality Real Estate Index Fund (Based on Net Asset Value)

    -7.16     -0.05     -1.19     2.23

FlexShares Global Quality Real Estate Index Fund (Based on Market Price)

    -6.84     0.02     -1.13     2.25

FTSE EPRA/NAREIT Developed IndexSM

    -6.03     0.08     -1.46     1.34

Northern Trust Global Quality Real Estate IndexSM

    -7.38     -0.34     -1.37     2.11

 

All data as of 10/31/23. Total returns based on market price do not include brokerage commissions that may be payable on secondary market transactions. If brokerage commissions were included, these returns would be lower. Total returns based on market price and net asset value (“NAV”) assume that dividends and capital gain distributions have been reinvested in the Fund at market price and NAV, respectively. NAV is calculated by dividing the total value of all the securities in the Fund’s portfolio plus cash, interest and receivables less any liabilities by the number of Fund shares outstanding. Market price is determined by the midpoint of the bid/ask spread at 4:00 p.m. Eastern Time from the primary listing exchange. Market price returns may vary from NAV returns.

 

Performance quoted represents past performance and does not guarantee future results. The graph and table do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption or sale of Fund shares. Unlike the index that the Fund seeks to track, the Fund’s total returns are reduced by operating expenses, such as transaction costs and management fees. An investor cannot invest directly in an index.

 

Performance reflects contractual reimbursements in effect until March 1, 2024. In the absence of such reimbursements, performance would be reduced. The gross expense ratio of the Fund is 0.46% and the net expense ratio is 0.45%. The gross and net expense ratios disclosed are as reported in the Fund’s prospectus, which may differ from the gross and net expense ratios presented in the Fund’s financial reports. Current performance may be higher or lower than performance shown. Investment return and the principal value of an investment will fluctuate. Shares may be worth more or less than original cost when redeemed or sold in the market.

 

FlexShares ETFs’ performance data current to the most recent month-end is available at www.flexshares.com.

 

PORTFOLIO ANALYSIS

 

The Fund seeks investment results that correspond generally to the price and yield performance, before fees and expenses, of the Northern Trust Global Quality Real Estate IndexSM (the “Underlying Index”). The Underlying Index is designed to reflect the performance of a selection of companies that, in the aggregate, possess greater exposure to quality, value and momentum factors relative to the Northern Trust Global Real Estate Index (the “Parent Index”), a float-adjusted market-capitalization weighted index of publicly traded equity securities of U.S. and non-U.S. real estate investment trusts (“REITs”) and real estate operating companies. In addition, the Underlying Index is designed to include companies with enhanced risk-return characteristics relative to the global publicly traded real-estate market by featuring quality, value and momentum risk premiums, which Northern Trust Investments, Inc. (“NTI”) believes have been historically demonstrated over a full market cycle. As of October 31, 2023, there were 137 issues in the Underlying Index. NTI uses a “passive” or indexing approach to try to achieve the Fund’s investment objective. NTI uses a representative sampling strategy to manage the Fund. This means that the Fund invests in a representative sample of securities that collectively has an investment profile similar to the Underlying Index. The Fund may or may not hold all of the securities that are included in the Underlying Index.

 

During the 12 months ending October 31, 2023, prices on global equity securities generally traded higher. Through Q4 of 2022 global markets rose as falling inflation and the anticipated boost to global growth resulting from the re-opening of China’s economy all supported equity security prices. Global equities continued higher over the first half of 2023, as investors looked past concerns in the banking sector to falling energy prices, lower inflation, and global growth was more resilient than expected. Over the first six months of 2023, technology companies led all sectors as artificial intelligence related companies drew interest, with seven U.S. large cap growth companies contributing a large portion of equity market gains. Global equities declined in Q3 of 2023, as higher energy prices, consumer spending concerns in

 

   FLEXSHARES ANNUAL REPORT     31  


Table of Contents

 

FlexShares®   MANAGEMENT’S DISCUSSION OF FUND PERFORMANCE

Global Quality Real Estate Index Fund (cont.)

 

 

 

 

 

 

PORTFOLIO ANALYSIS (cont.)

 

China, and the U.S. Federal Reserve’s outlook of “higher rates for longer” weighed on investors’ global growth outlook. Global equities continued lower in October of 2023, as slowing global growth concerns and increased geopolitical tensions weighed on markets.

 

The Underlying Index had a negative total return during the 12 months ended October 31, 2023, and underperformed the global equity real estate markets, as defined by the FTSE EPRA/NAREIT Developed Net Index1, by -1.35%. The value2 and quality3 factor exposures of the Underlying Index were negative drivers of Fund performance, while the momentum4 factor exposure was a positive driver of Fund performance. Overall, the positive exposure to momentum was not enough to offset the headwinds from the negative performance derived from the value and quality exposures. Tracking difference between the Fund’s NAV and the Underlying Index’s total return for the period was +22 basis points (“bps”)5, which is reflective of the Fund’s management fee (-45 bps), stock selection/futures (+8 bps), securities lending (+2 bps), dividend tax differential (+58 bps), and compounding of tracking error over time (-1 bps).

 

1

The FTSE EPRA/NAREIT Developed Net Index is an index designed to track the performance of listed real estate companies in both developed and emerging countries worldwide.

 

2 

The value factor is a factor reflecting the current worth of a company relative to its own historical value, book value or valuation versus peers.

 

3

The quality factor is a factor that seeks to identify companies that exhibit financial strength and stability relative to the Parent Index.

 

4 

The momentum factor is a factor that reflects market sentiment and changes in a security price over a given time period.

 

5 

A unit that is equal to 1/100th of 1% and is used to denote the change in a financial instrument.

 

32    FLEXSHARES ANNUAL REPORT  


Table of Contents

 

FlexShares®   MANAGEMENT’S DISCUSSION OF FUND PERFORMANCE

Real Assets Allocation Index Fund Ticker:  ASET

 

 

CUMULATIVE PERFORMANCE

Through October 31, 2023

 

LOGO

 

AVERAGE ANNUAL TOTAL RETURN

For the period ended October 31, 2023

 

    1 Year     3 Year     5 Year     Fund
Inception
11/23/2015
 
 

 

 

 

FlexShares Real Assets Allocation Index Fund (Based on Net Asset Value)

    -1.78     5.14     3.67     4.15

FlexShares Real Assets Allocation Index Fund (Based on Market Price)

    -1.99     5.09     3.63     4.13

MSCI ACWI Index

    10.50     6.68     7.48     7.69

Northern Trust Real Assets Allocation IndexSM

    -1.69     5.27     3.80     4.27

 

All data as of 10/31/23. Total returns based on market price do not include brokerage commissions that may be payable on secondary market transactions. If brokerage commissions were included, these returns would be lower. Total returns based on market price and net asset value (“NAV”) assume that dividends and capital gain distributions have been reinvested in the Fund at market price and NAV, respectively. NAV is calculated by dividing the total value of all the securities in the Fund’s portfolio plus cash, interest and receivables less any liabilities by the number of Fund shares outstanding. Market price is determined by the midpoint of the bid/ask spread at 4:00 p.m. Eastern Time from the primary listing exchange. Market price returns may vary from NAV returns.

 

Performance quoted represents past performance and does not guarantee future results. The graph and table do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption or sale of Fund shares. Unlike the index that the Fund seeks to track, the Fund’s total returns are reduced by operating expenses, such as transaction costs and management fees. An investor cannot invest directly in an index.

 

Performance reflects contractual reimbursements in effect until March 1, 2024. In the absence of such reimbursements, performance would be reduced. Prior to September 1, 2023, the gross expense ratio of the Fund was 1.04% and the net expense ratio was 0.57%. Effective September 1, 2023, the gross expense ratio of the Fund is 0.96% and the net expense ratio is 0.49%. The gross and net expense ratios disclosed are as reported in the Fund’s prospectus, which may differ from the gross and net expense ratios presented in the Fund’s financial reports. Current performance may be higher or lower than performance shown. Investment return and the principal value of an investment will fluctuate. Shares may be worth more or less than original cost when redeemed or sold in the market.

 

FlexShares ETFs’ performance data current to the most recent month-end is available at www.flexshares.com.

 

PORTFOLIO ANALYSIS

 

The Fund seeks investment results that correspond generally to the price and yield performance, before fees and expenses, of the Northern Trust Real Assets Allocation IndexSM (the “Underlying Index”). The Fund is a fund of funds and seeks to achieve its investment objective by investing primarily in the shares of other FlexShares ETFs (each an “Underlying Fund,” and together, the “Underlying Funds”) that are eligible for inclusion in the Underlying Index, rather than in securities of individual companies. The Underlying Funds themselves seek investment results corresponding to their own respective underlying indexes. The Underlying Funds invest primarily in separate sets of securities representing or providing exposures to global “real assets.” Real assets are defined by the index provider as physical or tangible assets. Examples of real assets include but are not limited to commodities, precious metals, oil, and real estate. Each Underlying Fund has its own risk profile and will contribute differently to the overall risk profile of the Fund. Each of the Underlying Funds invests in equity securities that are traded in or are issued by companies domiciled in global developed or emerging markets (including the U.S.). Certain of the Underlying Funds may invest in publicly traded units of master limited partnerships and real estate investment trusts. As of October 31, 2023, there were three Underlying Funds in the Underlying Index. Northern Trust Investments, Inc. (“NTI”) uses a “passive” or indexing approach to try to achieve the Fund’s investment objective. NTI generally intends to replicate the constituent securities of the Underlying Index to manage the Fund but may use representative sampling in certain circumstances. “Representative sampling” means investing in a representative sample of securities that collectively has an investment profile similar to the Underlying Index. When the Fund uses representative sampling, it may or may not hold all of the securities that are included in the Underlying Index.

 

During the 12 months ending October 31, 2023, prices on global equity securities generally traded higher. Through Q4 of 2022 global markets rose as falling inflation and the anticipated boost to global growth

 

   FLEXSHARES ANNUAL REPORT     33  


Table of Contents

 

FlexShares®   MANAGEMENT’S DISCUSSION OF FUND PERFORMANCE

Real Assets Allocation Index Fund (cont.)

 

 

 

 

 

 

PORTFOLIO ANALYSIS (cont.)

 

resulting from the re-opening of China’s economy all supported equity security prices. Global equities continued higher over the first half of 2023, as investors looked past concerns in the banking sector to falling energy prices, lower inflation and global growth was more resilient than expected. Over the first six months of 2023, technology companies led all sectors as artificial intelligence related companies drew interest, with seven U.S. large cap growth companies contributing a large portion of equity market gains. Global equities declined in Q3 of 2023, as higher energy prices, consumer spending concerns in China, and the U.S. Federal Reserve’s outlook of “higher rates for longer” weighed on investors’ global growth outlook. Global equities continued lower in October of 2023, as slowing global growth concerns and increased geopolitical tensions weighed on markets.

 

The Underlying Index had a negative total return during the 12 months ended October 31, 2023, underperforming global equity markets, as defined by the MSCI All Country World Index (ACWI)1 by -12.19%. All three asset classes within reals assets underperformed global equities. Global real estate and natural resources had negative performance over the 12-month period as rising global interest rates and falling energy prices negatively impacted each asset class, respectively. Infrastructure delivered positive performance for the 12-month period, but still trailed global equities as it was also negatively impacted by the rising rate environment. Tracking difference between the Fund’s NAV and the Underlying Index’s total return for the period was -9 basis points (“bps”)2, which is largely reflective of the Fund’s management fee (-57 bps), a reimbursement amount equal to the Acquired Fund Fees and Expenses attributable to the Fund’s investments in the Underlying Funds (+47 bps) and performance calculation differences between the Underlying Index and the Fund (+1 bp).

 

1

The MSCI All Country World Index is a market-capitalization-weighted index maintained by MSCI and is designed to provide a broad measure of stock performance throughout the world.

 

2 

A unit that is equal to 1/100th of 1% and is used to denote the change in a financial instrument.

 

34    FLEXSHARES ANNUAL REPORT  


Table of Contents

 

FlexShares®   MANAGEMENT’S DISCUSSION OF FUND PERFORMANCE

Quality Dividend Index Fund Ticker:  QDF

 

 

CUMULATIVE PERFORMANCE

Through October 31, 2023

 

LOGO

 

AVERAGE ANNUAL TOTAL RETURN

For the period ended October 31, 2023

 

    1 Year     5 Year     10 Year     Fund
Inception
12/14/2012
 
 

 

 

 

FlexShares Quality Dividend Index Fund (Based on Net Asset Value)

    6.52     7.13     8.49     10.46

FlexShares Quality Dividend Index Fund (Based on Market Price)

    6.50     7.13     8.48     10.46

Russell 1000® Index

    9.48     10.71     10.88     12.44

Northern Trust Quality Dividend IndexSM

    6.96     7.71     9.00     10.98

 

All data as of 10/31/23. Total returns based on market price do not include brokerage commissions that may be payable on secondary market transactions. If brokerage commissions were included, these returns would be lower. Total returns based on market price and net asset value (“NAV”) assume that dividends and capital gain distributions have been reinvested in the Fund at market price and NAV, respectively. NAV is calculated by dividing the total value of all the securities in the Fund’s portfolio plus cash, interest and receivables less any liabilities by the number of Fund shares outstanding. Market price is determined by the midpoint of the bid/ask spread at 4:00 p.m. Eastern Time from the primary listing exchange. Market price returns may vary from NAV returns.

 

Performance quoted represents past performance and does not guarantee future results. The graph and table do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption or sale of Fund shares. Unlike the index that the Fund seeks to track, the Fund’s total returns are reduced by operating expenses, such as transaction costs and management fees. An investor cannot invest directly in an index.

 

Performance reflects contractual reimbursements in effect until March 1, 2024. In the absence of such reimbursements, performance would be reduced. The gross expense ratio of the Fund is 0.38% and the net expense ratio is 0.37%. The gross and net expense ratios disclosed are as reported in the Fund’s prospectus, which may differ from the gross and net expense ratios presented in the Fund’s financial reports. Current performance may be higher or lower than performance shown. Investment return and the principal value of an investment will fluctuate. Shares may be worth more or less than original cost when redeemed or sold in the market.

 

FlexShares ETFs’ performance data current to the most recent month-end is available at www.flexshares.com.

 

PORTFOLIO ANALYSIS

 

The Fund seeks to provide investment results that correspond generally, before fees and expenses, to the price and yield performance of the Northern Trust Quality Dividend IndexSM (the “Underlying Index”). The Underlying Index is designed to reflect the performance of a selection of companies that, in the aggregate, provide exposure to a high-quality income-oriented universe of long-only U.S. equity securities, with an emphasis on long-term capital growth and a targeted overall beta1 that is similar to that of the Northern Trust 1250 Index2. As of October 31, 2023, there were 138 issues in the Underlying Index. Northern Trust Investments, Inc. (“NTI”) uses a “passive” or indexing approach to try to achieve the Fund’s investment objective. NTI uses a representative sampling strategy to manage the Fund. This means that the Fund invests in a representative sample of securities that collectively has an investment profile similar to the Underlying Index. The Fund may or may not hold all of the securities that are included in the Underlying Index.

 

During the 12 months ending October 31, 2023, prices on domestic equity securities generally traded higher. Through Q4 of 2022 U.S. equity markets moved modestly lower as inflation remained elevated, and the U.S. Federal Reserve (the “Fed”) continued to tighten monetary conditions through rate hikes. U.S. equities rose over the first half of 2023, as investors looked past the collapse of Silicon Valley Bank and the potential of a banking crisis, as inflation declined while Gross Domestic Product (GDP)3 growth was

 

1

A statistical measure of the volatility, or sensitivity, of rates of return on a portfolio or security compared to a market index and time period. The beta for an ETF measures the expected change in return of the ETF relative to the return of a designated index. By definition, the beta of the Standard & Poor’s (“S&P”) 500 Index is 1.00. Accordingly, a fund with a 1.10 beta is expected to perform 10% better than the S&P 500 Index in rising markets and 10% worse in falling markets.

 

2

Northern Trust 1250 Index is a float-adjusted market-capitalization weighted index comprised of U.S. domiciled large- and mid-capitalization companies.

 

3 

9 GDP is seen as a comprehensive measure of U.S. economic activity which measures the value of the final goods and services produced in the United States.

 

   FLEXSHARES ANNUAL REPORT     35  


Table of Contents

 

FlexShares®   MANAGEMENT’S DISCUSSION OF FUND PERFORMANCE

Quality Dividend Index Fund (cont.)

 

 

PORTFOLIO ANALYSIS(cont.)

 

more resilient than expected. The Fed continued to hike interest rates through the first three meetings of the year, but lowered the magnitude of those hikes to one-quarter percent each before pausing at the June meeting. Over the first six months of 2023, technology companies led all sectors as artificial intelligence related companies drew interest, with seven large cap growth companies contributing a large portion of equity market gains. Domestic equity securities declined in Q3 of 2023, as inflation increased in July and August of 2023, and the Fed reiterated their outlook of “higher rates for longer” than we believe markets had priced in at the beginning of Q3 of 2023. U.S. equity markets continued to decline in October of 2023, as inflation remained resilient and there were increased concerns of slowing global growth due to weakness in China’s economy.

 

Because of the resiliency of the economic data, the falling inflation environment, and the rising rate environment, U.S. domestic investments trended higher during the 12 months ended October 31, 2023; however, a large portion of the overall return for market weighted indices was concentrated in seven mega cap growth companies4. We believe the dividend yield factor5 was a negative driver of Fund performance as higher yielding investments underperformed lower yielding and non-dividend paying investments. In addition, we believe that the changes experienced in the macroeconomic environment as well as the increase in interest rates were conducive to high quality factor6 companies, resulting in the high-quality factor exposure augmenting Fund performance over the 12 months. Overall, the positive performance derived from the quality factor exposure was not enough to offset the negative performance from the dividend yield factor of the Underlying Index and was the primary source of the Underlying Index’s underperformance against the Russell 1000® Index7 by

-2.52%. Tracking difference between the Fund’s NAV and the Underlying Index’s total return for the 12-month period was -44 basis points (“bps”)8, which is reflective of the management fee (-37 bps), stock selection/futures (-8 bps), securities lending (+6 bps), and dividend tax differential (-5 bps).

 

 

4

Size is measured by a stock’s total capitalization which can be found by multiplying the current share price by all the outstanding shares of stock.

 

5

Dividend yield factor is a factor that seeks to identify companies that realize a dividend yield above the Parent Index.

6

The quality factor is a factor that seeks to identify companies that exhibit stable returns relative to the market.

 

7

The Russell 1000® Index refers to a stock market index that represents the 1000 top companies in the United States.

 

8

A unit that is equal to 1/100th of 1% and is used to denote the change in a financial instrument.

 

36    FLEXSHARES ANNUAL REPORT  


Table of Contents

 

FlexShares® Quality   MANAGEMENT’S DISCUSSION OF FUND PERFORMANCE

Dividend Defensive Index Fund Ticker:  QDEF

 

 

CUMULATIVE PERFORMANCE

Through October 31, 2023

 

LOGO

 

AVERAGE ANNUAL TOTAL RETURN

For the period ended October 31, 2023

 

    1 Year     5 Year     10 Year     Fund
Inception
12/14/2012
 
 

 

 

 

FlexShares Quality Dividend Defensive Index Fund (Based on Net Asset Value)

    7.82     7.34     8.80     10.50

FlexShares Quality Dividend Defensive Index Fund (Based on Market Price)

    7.74     7.33     8.77     10.50

Russell 1000® Index

    9.48     10.71     10.88     12.44

Northern Trust Quality Dividend Defensive IndexSM

    8.20     7.79     9.35     11.04

 

All data as of 10/31/23. Total returns based on market price do not include brokerage commissions that may be payable on secondary market transactions. If brokerage commissions were included, these returns would be lower. Total returns based on market price and net asset value (“NAV”) assume that dividends and capital gain distributions have been reinvested in the Fund at market price and NAV, respectively. NAV is calculated by dividing the total value of all the securities in the Fund’s portfolio plus cash, interest and receivables less any liabilities by the number of Fund shares outstanding. Market price is determined by the midpoint of the bid/ask spread at 4:00 p.m. Eastern Time from the primary listing exchange. Market price returns may vary from NAV returns.

 

Performance quoted represents past performance and does not guarantee future results. The graph and table do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption or sale of Fund shares. Unlike the index that the Fund seeks to track, the Fund’s total returns are reduced by operating expenses, such as transaction costs and management fees. An investor cannot invest directly in an index.

 

Performance reflects contractual reimbursements in effect until March 1, 2024. In the absence of such reimbursements, performance would be reduced. The gross expense ratio of the Fund is 0.38% and the net expense ratio is 0.37%. The gross and net expense ratios disclosed are as reported in the Fund’s prospectus, which may differ from the gross and net expense ratios presented in the Fund’s financial reports. Current performance may be higher or lower than performance shown. Investment return and the principal value of an investment will fluctuate. Shares may be worth more or less than original cost when redeemed or sold in the market.

 

FlexShares ETFs’ performance data current to the most recent month-end is available at www.flexshares.com.

 

PORTFOLIO ANALYSIS

 

The Fund seeks to provide investment results that correspond generally, before fees and expenses, to the price and yield performance of the Northern Trust Quality Dividend Defensive IndexSM (the “Underlying Index”). The Underlying Index is designed to reflect the performance of a selection of companies that, in the aggregate, provide exposure to a high-quality income-oriented universe of long-only U.S. equity securities, with an emphasis on long-term capital growth and a targeted overall beta1 that is generally between 0.5 to 1.0 times that of the Northern Trust 1250 Index2. As of October 31, 2023, there were 127 issues in the Underlying Index. Northern Trust Investments, Inc. (“NTI”) uses a “passive” or indexing approach to try to achieve the Fund’s investment objective. NTI uses a representative sampling strategy to manage the Fund. This means that the Fund invests in a representative sample of securities that collectively has an investment profile similar to the Underlying Index. The Fund may or may not hold all of the securities that are included in the Underlying Index.

 

During the 12 months ending October 31, 2023, prices on domestic equity securities generally traded higher. Through Q4 of 2022 U.S. equity markets moved modestly lower as inflation remained elevated, and the U.S. Federal Reserve (the “Fed”) continued to tighten monetary conditions through rate hikes. U.S. equities rose over the first half of 2023, as investors looked past the collapse of Silicon Valley Bank and the potential of a banking crisis, as inflation declined while Gross Domestic Product (GDP)3 growth was

 

1

A statistical measure of the volatility, or sensitivity, of rates of return on a portfolio or security compared to a market index and time period. The beta for an ETF measures the expected change in return of the ETF relative to the return of a designated index. By definition, the beta of the S&P 500 Index is 1.00. Accordingly, a fund with a 1.10 beta is expected to perform 10% better than the S&P 500 Index in rising markets and 10% worse in falling markets.

 

2

Northern Trust 1250 Index is a float-adjusted market-capitalization weighted index comprised of U.S. domiciled large- and mid-capitalization companies.

 

3

GDP is seen as a comprehensive measure of U.S. economic activity which measures the value of the final goods and services produced in the United States.

 

   FLEXSHARES ANNUAL REPORT     37  


Table of Contents

 

FlexShares® Quality   MANAGEMENT’S DISCUSSION OF FUND PERFORMANCE

Dividend Defensive Index Fund (cont.)

 

 

PORTFOLIO ANALYSIS (cont.)

 

more resilient than expected. The Fed continued to hike interest rates through the first three meetings of the year, but lowered the magnitude of those hikes to one-quarter percent each before pausing at the June meeting. Over the first six months of 2023, technology companies led all sectors as artificial intelligence related companies drew interest, with seven large cap growth companies contributing a large portion of equity market gains. Domestic equity securities declined in Q3 of 2023, as inflation increased in July and August of 2023, and the Fed reiterated their outlook of “higher rates for longer” than we believe markets had priced in at the beginning of Q3 of 2023. U.S. equity markets continued to decline in October of 2023, as inflation remained resilient and there were increased concerns of slowing global growth due to weakness in China’s economy.

 

Because of the resiliency of the economic data, the falling inflation environment, and the rising rate environment, U.S. domestic investments trended higher during the 12 months ended October 31, 2023; however, a large portion of the overall return for market weighted indices was concentrated in seven mega cap growth companies4. We believe the dividend yield factor5 was a negative driver of Fund performance as higher yielding investments underperformed lower yielding and non-dividend paying investments. In addition, we believe that the changes experienced in the macroeconomic environment as well as the increase in interest rates were conducive to high quality factor6 companies, resulting in the high-quality factor exposure augmenting Fund performance over the 12 months. Though equity markets were generally higher over the full 12-month period, there were several downturns within the year, and we believe the lower beta exposure benefited the Underlying Index. Overall, the positive performance derived from the quality factor exposure was not enough to offset the negative performance from the dividend yield factor of the Underlying Index, and was the primary source of the Underlying Index’s underperformance against the Russell 1000® Index7 by -1.28%.

Tracking difference between the Fund’s NAV and the Underlying Index’s total return for the 12month period was -38 basis points (“bps”)8, which is reflective of the management fee (-37 bps), stock selection/futures (-3 bps), securities lending (+6 bps), dividend tax differential (-4 bps).

 

4

Size is measured by a stock’s total capitalization which can be found by multiplying the current share price by all the outstanding shares of stock.

 

5

Dividend yield factor is a factor that seeks to identify companies that realize a dividend yield above the Parent Index.

 

6

The quality factor is a factor that seeks to identify companies that exhibit stable returns relative to the market.

 

7

The Russell 1000® Index refers to a stock market index that represents the 1000 top companies in the United States.

 

8

A unit that is equal to 1/100th of 1% and is used to denote the change in a financial instrument.

 

38    FLEXSHARES ANNUAL REPORT  


Table of Contents

 

FlexShares® International   MANAGEMENT’S DISCUSSION OF FUND PERFORMANCE

Quality Dividend Index Fund Ticker:   IQDF

 

 

CUMULATIVE PERFORMANCE

Through October 31, 2023

 

LOGO

 

AVERAGE ANNUAL TOTAL RETURN

For the period ended October 31, 2023

 

    1 Year     5 Year     10 Year     Fund
Inception
4/12/2013
 
 

 

 

 

FlexShares International Quality Dividend Index Fund (Based on Net Asset Value)

    17.45     3.10     1.67     4.44

FlexShares International Quality Dividend Index Fund (Based on Market Price)

    17.92     3.27     1.66     4.44

MSCI AC World ex USA Index

    12.07     3.46     2.54     3.27

Northern Trust International Quality Dividend IndexSM

    18.24     3.40     2.02     2.79

 

All data as of 10/31/23. Total returns based on market price do not include brokerage commissions that may be payable on secondary market transactions. If brokerage commissions were included, these returns would be lower. Total returns based on market price and net asset value (“NAV”) assume that dividends and capital gain distributions have been reinvested in the Fund at market price and NAV, respectively. NAV is calculated by dividing the total value of all the securities in the Fund’s portfolio plus cash, interest and receivables less any liabilities by the number of Fund shares outstanding. Market price is determined by the midpoint of the bid/ask spread at 4:00 p.m. Eastern Time from the primary listing exchange. Market price returns may vary from NAV returns.

 

Performance quoted represents past performance and does not guarantee future results. The graph and table do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption or sale of Fund shares. Unlike the index that the Fund seeks to track, the Fund’s total returns are reduced by operating expenses, such as transaction costs and management fees. An investor cannot invest directly in an index.

 

Performance reflects contractual reimbursements in effect until March 1, 2024. In the absence of such reimbursements, performance would be reduced. The gross expense ratio of the Fund is 0.48% and the net expense ratio is 0.47%. The gross and net expense ratios disclosed are as reported in the Fund’s prospectus, which may differ from the gross and net expense ratios presented in the Fund’s financial reports. Current performance may be higher or lower than performance shown. Investment return and the principal value of an investment will fluctuate. Shares may be worth more or less than original cost when redeemed or sold in the market.

 

FlexShares ETFs’ performance data current to the most recent month-end is available at www.flexshares.com.

 

PORTFOLIO ANALYSIS

 

The Fund seeks to provide investment results that correspond generally, before fees and expenses, to the price and yield performance of the Northern Trust International Quality Dividend IndexSM (the “Underlying Index”). The Underlying Index is designed to reflect the performance of a selection of companies that, in the aggregate, provide exposure to a high-quality income-oriented universe of long-only international securities issued by non-U.S. based companies, with an emphasis on long-term capital growth and a targeted overall beta1 that is similar to that of the Northern Trust International Large Cap Index2. As of October 31, 2023, there were 191 issues in the Underlying Index. Northern Trust Investments, Inc. (“NTI”) uses a “passive” or indexing approach to try to achieve the Fund’s investment objective. NTI uses a representative sampling strategy to manage the Fund. This means that the Fund invests in a representative sample of securities that collectively has an investment profile similar to the Underlying Index. The Fund may or may not hold all of the securities that are included in the Underlying Index.

 

During the 12 months ending October 31, 2023, prices on international equity securities generally traded higher. Over the course of the 12-month period the U.S. dollar (USD) declined and positively impacted U.S. investors as returns in international currencies generally were aided by the falling USD. Through Q4 of 2022, international markets rose as falling inflation and the anticipated boost to global growth resulting from the re-opening of China’s economy all supported equity security prices. International equities continued higher over the first half of 2023, as investors looked past concerns in the

 

1 

A statistical measure of the volatility, or sensitivity, of rates of return on a portfolio or security compared to a market index and time period. The beta for an ETF measures the expected change in return of the ETF relative to the return of a designated index. By definition, the beta of the S&P 500 Index is 1.00. Accordingly, a fund with a 1.10 beta is expected to perform 10% better than the S&P 500 Index in rising markets and 10% worse in falling markets.

 

2 

Northern Trust International Large Cap Index is a float-adjusted market-capitalization weighted index comprised of non-U.S. domiciled large-and mid-capitalization companies.

 

   FLEXSHARES ANNUAL REPORT     39  


Table of Contents

 

FlexShares® International   MANAGEMENT’S DISCUSSION OF FUND PERFORMANCE

Quality Dividend Index Fund (cont.)

 

 

PORTFOLIO ANALYSIS (cont.)

 

banking sector to falling energy prices, lower inflation, and strength in the technology and consumer discretionary sectors. International equities declined in Q3 of 2023, as higher energy prices and consumer spending concerns in China and Europe weighed on investors’ global growth outlook. International equities continued lower in October of 2023, as slowing global growth concerns and increased geopolitical tensions weighed on markets.

 

Because of the improved inflation outlook over the 12-month period, developed international investments trended higher during the 12 months ended October 31, 2023, and we believe the dividend yield factor3 was a positive driver of Fund performance as higher yielding investments outperformed lower yielding and non-dividend paying investments. In addition, we believe that the changes experienced in the macroeconomic environment as well as the increase in interest rates were conducive to high quality factor4 companies, resulting in the high-quality factor exposure augmenting Fund performance over the 12 months. Overall, the positive performance derived from the dividend and quality factor exposures of the Underlying Index were the primary sources of the Underlying Index’s outperformance against the MSCI All Country World Index Ex-U.S. Index5 by 6.17%. Tracking difference between the Fund’s NAV and the Underlying Index’s total return for the 12-month period was -79 basis points (“bps”)6, which is reflective of the Fund’s management fee (-47 bps), stock selection/futures (-16 bps), securities lending (+5 bps), India Capital Gains Taxes (-20 bps), and compounding of tracking error over time (-1 bps).

 

3 

Dividend yield factor is a factor that seeks to identify companies that realize a dividend yield above the Parent Index.

 

4 

The quality factor is a factor that seeks to identify companies that exhibit stable returns relative to the market.

 

5

The MSCI All Country World Index Ex-U.S. is a market-capitalization-weighted index maintained by MSCI and is designed to provide a broad measure of stock performance throughout the world, with the exception of U.S.-based companies.

 

6 

A unit that is equal to 1/100th of 1% and is used to denote the change in a financial instrument.

 

 

40    FLEXSHARES ANNUAL REPORT  


Table of Contents

 

FlexShares® International   MANAGEMENT’S DISCUSSION OF FUND PERFORMANCE

Quality Dividend Defensive Index Fund Ticker:  IQDE

 

 

CUMULATIVE PERFORMANCE

Through October 31, 2023

 

LOGO

 

AVERAGE ANNUAL TOTAL RETURN

For the period ended October 31, 2023

 

    1 Year     5 Year     10 Year     Fund
Inception
4/12/2013
 
 

 

 

 

FlexShares International Quality Dividend Defensive Index Fund (Based on Net Asset Value)

    12.54     2.10     0.89     1.60

FlexShares International Quality Dividend Defensive Index Fund (Based on Market Price)

    13.05     2.22     0.84     1.61

MSCI AC World ex USA Index

    12.07     3.46     2.54     3.27

Northern Trust International Quality Dividend Defensive IndexSM

    13.27     2.46     1.40     2.09

 

All data as of 10/31/23. Total returns based on market price do not include brokerage commissions that may be payable on secondary market transactions. If brokerage commissions were included, these returns would be lower. Total returns based on market price and net asset value (“NAV”) assume that dividends and capital gain distributions have been reinvested in the Fund at market price and NAV, respectively. NAV is calculated by dividing the total value of all the securities in the Fund’s portfolio plus cash, interest and receivables less any liabilities by the number of Fund shares outstanding. Market price is determined by the midpoint of the bid/ask spread at 4:00 p.m. Eastern Time from the primary listing exchange. Market price returns may vary from NAV returns.

 

Performance quoted represents past performance and does not guarantee future results. The graph and table do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption or sale of Fund shares. Unlike the index that the Fund seeks to track, the Fund’s total returns are reduced by operating expenses, such as transaction costs and management fees. An investor cannot invest directly in an index.

 

Performance reflects contractual reimbursements in effect until March 1, 2024. In the absence of such reimbursements, performance would be reduced. The gross expense ratio of the Fund is 0.48% and the net expense ratio is 0.47%. The gross and net expense ratios disclosed are as reported in the Fund’s prospectus, which may differ from the gross and net expense ratios presented in the Fund’s financial reports. Current performance may be higher or lower than performance shown. Investment return and the principal value of an investment will fluctuate. Shares may be worth more or less than original cost when redeemed or sold in the market.

 

FlexShares ETFs’ performance data current to the most recent month-end is available at www.flexshares.com.

 

PORTFOLIO ANALYSIS

 

The Fund seeks to provide investment results that correspond generally, before fees and expenses, to the price and yield performance of the Northern Trust International Quality Dividend Defensive IndexSM (the “Underlying Index”). The Underlying Index is designed to reflect the performance of a selection of companies that, in the aggregate, provide exposure to a high-quality income-oriented universe of long-only international securities issued by non-U.S. based companies, with an emphasis on long-term capital growth and a targeted overall beta1 that is generally between 0.5 to 1.0 times that of the Northern Trust International Large Cap Index2. As of October 31, 2023, there were 197 issues in the Underlying Index. Northern Trust Investments, Inc. (“NTI”) uses a “passive” or indexing approach to try to achieve the Fund’s investment objective. NTI uses a representative sampling strategy to manage the Fund. This means that the Fund invests in a representative sample of securities that collectively has an investment profile similar to the Underlying Index. The Fund may or may not hold all of the securities that are included in the Underlying Index.

 

During the 12 months ending October 31, 2023, prices on international equity securities generally traded higher. Over the course of the 12-month period the U.S. dollar (USD) declined and positively impacted U.S. investors as returns in international currencies generally were aided by the falling USD. Through Q4 of 2022, international markets rose as falling inflation and the anticipated boost to global growth resulting from the re-opening of China’s economy all supported equity security prices. International equities

 

1 

A statistical measure of the volatility, or sensitivity, of rates of return on a portfolio or security compared to a market index and time period. The beta for an ETF measures the expected change in return of the ETF relative to the return of a designated index. By definition, the beta of the S&P 500 Index is 1.00. Accordingly, a fund with a 1.10 beta is expected to perform 10% better than the S&P 500 Index in rising markets and 10% worse in falling markets.

 

2 

Northern Trust International Large Cap Index is a float-adjusted market-capitalization weighted index comprised of non-U.S. domiciled large- and mid-capitalization companies.

 

   FLEXSHARES ANNUAL REPORT     41  


Table of Contents

 

FlexShares® International   MANAGEMENT’S DISCUSSION OF FUND PERFORMANCE

Quality Dividend Defensive Index Fund (cont.)

 

 

PORTFOLIO ANALYSIS (cont.)

 

continued higher over the first half of 2023, as investors looked past concerns in the banking sector to falling energy prices, lower inflation, and strength in the technology and consumer discretionary sectors. International equities declined in Q3 of 2023, as higher energy prices and consumer spending concerns in China and Europe weighed on investors’ global growth outlook. International equities continued lower in October of 2023, as slowing global growth concerns and increased geopolitical tensions weighed on markets.

 

Because of the improved inflation outlook over the 12-month period, developed international investments trended higher during the 12 months ended October 31, 2023, and we believe the dividend yield factor3 was a positive driver of Fund performance as higher yielding investments outperformed lower yielding and non-dividend paying investments. In addition, we believe that the changes experienced in the macroeconomic environment as well as the increase in interest rates were conducive to high quality factor4 companies, resulting in the high-quality factor exposure augmenting Fund performance over the 12 months. Because international equities moved higher over the 12 months, we believe that the low beta exposure detracted from Fund performance. Overall, the positive performance derived from the dividend and quality factor exposures of the Underlying Index were the primary sources of the Underlying Index’s outperformance against the MSCI All Country World Index Ex-U.S. Index5 by 1.20%.Tracking difference between the Fund’s NAV and the Underlying Index’s total return for the 12-month period was -73 basis points (“bps”)6, which is reflective of the Fund’s

management fee (-47 bps), stock selection/futures (-29 bps), securities lending (+5 bps), India Cap Gain Tax (-1 bps) and compounding of tracking error over time (-1 bps).

3 

Dividend yield factor is a factor that seeks to identify companies that realize a dividend yield above the Parent Index.

 

4 

The quality factor is a factor that seeks to identify companies that exhibit stable returns relative to the market.

5 

The MSCI All Country World Index Ex-U.S. is a market-capitalization-weighted index maintained by MSCI and is designed to provide a broad measure of stock performance throughout the world, with the exception of U.S.-based companies.

 

6 

A unit that is equal to 1/100th of 1% and is used to denote the change in a financial instrument.

 

42    FLEXSHARES ANNUAL REPORT  


Table of Contents

 

FlexShares® International   MANAGEMENT’S DISCUSSION OF FUND PERFORMANCE

Quality Dividend Dynamic Index Fund Ticker:  IQDY

 

 

CUMULATIVE PERFORMANCE

Through October 31, 2023

 

LOGO

 

AVERAGE ANNUAL TOTAL RETURN

For the period ended October 31, 2023

 

    1 Year     5 Year     10 Year     Fund
Inception
4/12/2013
 
 

 

 

 

FlexShares International Quality Dividend Dynamic Index Fund (Based on Net Asset Value)

    19.39     5.20     3.04     3.95

FlexShares International Quality Dividend Dynamic Index Fund (Based on Market Price)

    20.37     5.42     3.09     4.00

MSCI AC World ex USA Index

    12.07     3.46     2.54     3.27

Northern Trust International Quality Dividend Dynamic IndexSM

    20.36     5.61     3.49     4.40

 

All data as of 10/31/23. Total returns based on market price do not include brokerage commissions that may be payable on secondary market transactions. If brokerage commissions were included, these returns would be lower. Total returns based on market price and net asset value (“NAV”) assume that dividends and capital gain distributions have been reinvested in the Fund at market price and NAV, respectively. NAV is calculated by dividing the total value of all the securities in the Fund’s portfolio plus cash, interest and receivables less any liabilities by the number of Fund shares outstanding. Market price is determined by the midpoint of the bid/ask spread at 4:00 p.m. Eastern Time from the primary listing exchange. Market price returns may vary from NAV returns.

 

Performance quoted represents past performance and does not guarantee future results. The graph and table do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption or sale of Fund shares. Unlike the index that the Fund seeks to track, the Fund’s total returns are reduced by operating expenses, such as transaction costs and management fees. An investor cannot invest directly in an index.

 

Performance reflects contractual reimbursements in effect until March 1, 2024. In the absence of such reimbursements, performance would be reduced. The gross expense ratio of the Fund is 0.48% and the net expense ratio is 0.47%. The gross and net expense ratios disclosed are as reported in the Fund’s prospectus, which may differ from the gross and net expense ratios presented in the Fund’s financial reports. Current performance may be higher or lower than performance shown. Investment return and the principal value of an investment will fluctuate. Shares may be worth more or less than original cost when redeemed or sold in the market.

 

FlexShares ETFs’ performance data current to the most recent month-end is available at www.flexshares.com.

 

PORTFOLIO ANALYSIS

 

The Fund seeks to provide investment results that correspond generally, before fees and expenses, to the price and yield performance of the Northern Trust International Quality Dividend Dynamic IndexSM (the “Underlying Index”). The Underlying Index is designed to reflect the performance of a selection of companies that, in the aggregate, provide exposure to a high-quality income-oriented universe of long-only international securities issued by non-U.S. based companies, with an emphasis on long-term capital growth and a targeted overall beta1 that is generally between 1.0 to 1.5 times that of the Northern Trust International Large Cap Index2. As of October 31, 2023, there were 171 issues in the Underlying Index. Northern Trust Investments, Inc. (“NTI”) uses a “passive” or indexing approach to try to achieve the Fund’s investment objective. NTI uses a representative sampling strategy to manage the Fund. This means that the Fund invests in a representative sample of securities that collectively has an investment profile similar to the Underlying Index. The Fund may or may not hold all of the securities that are included in the Underlying Index.

 

During the 12 months ending October 31, 2023, prices on international equity securities generally traded higher. Over the course of the 12-month period the U.S. dollar (USD) declined and positively impacted U.S. investors as returns in international currencies generally were aided by the falling USD. Through Q4 of 2022, international markets rose as falling inflation and the anticipated boost to global growth resulting from the re-opening of China’s economy all supported equity security prices. International equities

 

1 

A statistical measure of the volatility, or sensitivity, of rates of return on a portfolio or security compared to a market index and time period. The beta for an ETF measures the expected change in return of the ETF relative to the return of a designated index. By definition, the beta of the S&P 500 Index is 1.00. Accordingly, a fund with a 1.10 beta is expected to perform 10% better than the S&P 500 Index in rising markets and 10% worse in falling markets.

 

2 

Northern Trust International Large Cap Index is a float-adjusted market-capitalization weighted index comprised of non-U.S. domiciled large- and mid-capitalization companies.

 

   FLEXSHARES ANNUAL REPORT     43  


Table of Contents

 

FlexShares® International   MANAGEMENT’S DISCUSSION OF FUND PERFORMANCE

Quality Dividend Dynamic Index Fund (cont.)

 

 

PORTFOLIO ANALYSIS (cont.)

 

continued higher over the first half of 2023, as investors looked past concerns in the banking sector to falling energy prices, lower inflation, and strength in the technology and consumer discretionary sectors. International equities declined in Q3 of 2023, as higher energy prices and consumer spending concerns in China and Europe weighed on investors’ global growth outlook. International equities continued lower in October of 2023, as slowing global growth concerns and increased geopolitical tensions weighed on markets.

 

Because of the improved inflation outlook over the 12-month period, developed international investments trended higher during the 12 months ended October 31, 2023 and we believe the dividend yield factor3 was a positive driver of Fund performance as higher yielding investments outperformed lower yielding and non-dividend paying investments. In addition, we believe that the changes experienced in the macroeconomic environment as well as the increase in interest rates were conducive to high quality factor4 companies, resulting in the high-quality factor exposure augmenting Fund performance over the 12 months. Because international equities moved higher over the 12 months, we believe that the high beta exposure also positively contributed to Fund performance. Overall, the positive performance derived from the dividend and quality factor exposures of the Underlying Index were the primary sources of the Underlying Index’s outperformance against the MSCI All Country World Index Ex-U.S. Index5 by 8.29%.

Tracking difference between the Fund’s NAV and the Underlying Index’s total return for the 12-month period was -97 basis points (“bps”)6, which is reflective of the Fund’s management fee (47 bps), stock selection/futures (-24 bps), securities lending (+4 bps), dividend tax differential (1 bps), performance calculation differences between the Underlying Index and the Fund (+1 bps), and India Cap Gain Tax (-30 bps).

3 

Dividend yield factor is a factor that seeks to identify companies that realize a dividend yield above the Parent Index.

 

4 

The quality factor is a factor that seeks to identify companies that exhibit stable returns relative to the market.

5 

The MSCI All Country World Index Ex-U.S. is a market-capitalization-weighted index maintained by MSCI and is designed to provide a broad measure of stock performance throughout the world, with the exception of U.S.-based companies.

 

6 

A unit that is equal to 1/100th of 1% and is used to denote the change in a financial instrument.

 

44    FLEXSHARES ANNUAL REPORT  


Table of Contents

 

FlexShares® iBoxx   MANAGEMENT’S DISCUSSION OF FUND PERFORMANCE

3-Year Target Duration TIPS Index Fund      Ticker:  TDTT

 

 

CUMULATIVE PERFORMANCE

Through October 31, 2023

 

LOGO

 

AVERAGE ANNUAL TOTAL RETURN

For the period ended October 31, 2023

 

    1 Year     5 Year     10 Year     Fund
Inception
9/19/2011
 
 

 

 

 

FlexShares iBoxx 3-Year Target Duration TIPS
Index Fund (Based on Net Asset Value)

    1.84     3.01     1.59     1.42

FlexShares iBoxx 3-Year Target Duration TIPS
Index Fund (Based on Market Price)

    1.76     3.03     1.60     1.42

iBoxx 3-Year Target Duration TIPS Index

    1.99     3.20     1.77     1.58

 

All data as of 10/31/23. Total returns based on market price do not include brokerage commissions that may be payable on secondary market transactions. If brokerage commissions were included, these returns would be lower. Total returns based on market price and net asset value (“NAV”) assume that dividends and capital gain distributions have been reinvested in the Fund at market price and NAV, respectively. NAV is calculated by dividing the total value of all the securities in the Fund’s portfolio plus cash, interest and receivables less any liabilities by the number of Fund shares outstanding. Market price is determined by the midpoint of the bid/ask spread at 4:00 p.m. Eastern Time from the primary listing exchange. Market price returns may vary from NAV returns.

 

Performance quoted represents past performance and does not guarantee future results. The graph and table do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption or sale of Fund shares. Unlike the index that the Fund seeks to track, the Fund’s total returns are reduced by operating expenses, such as transaction costs and management fees. An investor cannot invest directly in an index.

 

Performance reflects contractual reimbursements in effect until March 1, 2024. In the absence of such reimbursements, performance would be reduced. The gross expense ratio of the Fund is 0.19% and the net expense ratio is 0.18%. The gross and net expense ratios disclosed are as reported in the Fund’s prospectus, which may differ from the gross and net expense ratios presented in the Fund’s financial reports. Current performance may be higher or lower than performance shown. Investment return and the principal value of an investment will fluctuate. Shares may be worth more or less than original cost when redeemed or sold in the market.

 

FlexShares ETFs’ performance data current to the most recent month-end is available at www.flexshares.com.

 

PORTFOLIO ANALYSIS

 

The Fund seeks to provide investment results that, before fees and expenses, correspond generally to the price and yield performance of the iBoxx 3-Year Target Duration TIPS Index (the “Underlying Index”). The Underlying Index is designed to reflect the performance of a selection of inflation protected public obligations of the U.S. Treasury, commonly known as “TIPS”, with a targeted average modified adjusted duration1 as defined by S&P Dow Jones Indices LLC as the index provider, of approximately three years. The Underlying Index includes publicly issued TIPS that have maturity dates of at least one year but not more than ten years from an index rebalancing date. As of October 31, 2023, there were 27 TIPS in the Underlying Index. Northern Trust Investments, Inc. (“NTI”) uses a “passive” or indexing approach to achieve the Fund’s investment objective. NTI generally intends to replicate the constituent securities of the Underlying Index to manage the Fund but may use representative sampling in certain circumstances. “Representative sampling” means investing in a representative sample of securities that collectively has an investment profile similar to the Underlying Index. When the Fund uses representative sampling, it may or may not hold all of the securities that are included in the Underlying Index.

 

In the beginning of the fiscal year ending October 31, 2023, fixed income investments moved higher coming off extremely depressed levels, as market implied odds over a soft landing versus hard landing fluctuated. The beginning of the 2023 calendar year saw fixed income assets continue to post positive results despite significant interest rate volatility. Ultimately, the 2-year and 10-year treasury yields dropped in parallel down 0.40% in Q1 of 2023, while the U.S. Federal Reserve (the “Fed”) raised the Fed Funds rate twice. Overall, the markets entered a period of extreme volatility in March of 2023, following the regional banking disruptions as

 

1 

The duration calculated from the real modified duration of a TIPS security, adjusted for the market’s estimated beta for a TIPS security versus a nominal Treasury security due to the actual and expected changes in inflation.

 

   FLEXSHARES ANNUAL REPORT     45  


Table of Contents

 

FlexShares® iBoxx   MANAGEMENT’S DISCUSSION OF FUND PERFORMANCE

3-Year Target Duration TIPS Index Fund (cont.)

 

 

PORTFOLIO ANALYSIS (cont.)

 

well as a rescue of a Swiss Bank. The ICE BofA MOVE Index2, which measures bond market volatility, spiked on March 15, 2023 to a price of 198, which was a level last seen during the Great Financial Crisis. As Q1 of 2023 came to a close, fixed income investments rallied as investors sought relative safety, and systemic banking concerns were diminishing.

 

By the summer of 2023, treasury rates increased as inflation remained elevated as strength persisted in the U.S. labor market amidst the rising rate environment. During Q2 of 2023, the 2-year treasury yields rose 0.87%, the 10-year treasury yields rose 0.37%, and the 30-year treasury yields rose by 0.21%. While the Fed did hike rates heading into the summer, they chose to pause in June of 2023. Inflation remained elevated into Q3 of 2023, and the labor market remained resilient. The Fed left rates unchanged at their September 2023 meeting, though market participants interpreted that decision as a hawkish pause to allow time to further evaluate the influence of the overall tightening on the U.S. economy. Treasuries sold off throughout Q3 of 2023, specifically in the middle to long end of the yield curve3 with 10-year and 30-year treasury yields rising to 4.57% and 4.70%, respectively.

 

During October of 2023, fixed income investments were under pressure as we observed a continuation in the rise of interest rates, which we believe was driven not by the changing expectations for inflation or the Fed, but instead an increase in the required term premium, or the compensation that investors require for bearing the risk that interest rates may change over the life of the bond, given economic uncertainty and interest rate volatility.

TIPS inflation breakeven4 spreads moved lower during the fiscal year as investors weighed the impact of Fed actions and geopolitical events on future inflation potential. Headline inflation measures receded, though core services components remained elevated. The disinflationary period post the pandemic-era inflation shocks coincided with longer-term, structural forces such as labor market demographics, supply chain orientation, and green transition. Inflation expectations diminished, but remained modestly elevated against Fed policy levels. By the end of the fiscal year 2023, the 12-month change in TIPs breakeven spreads were: 1-year: -50 basis points (“bps”)5, 5-year: -28 bps, 10-year: -10 bps and 30-year: -2 bps.

 

Despite rising real interest rates, or an interest rate that has been adjusted for inflation, during the fiscal year 2023, both the Fund and the Underlying Index displayed positive total return performance. For the 12-month period, the NAV performance of the Fund outperformed the Bloomberg U.S. TIPS 1-10 Year Index6 by 79 bps, due in part to lower overall duration in the 1-3-year section of the TIPS yield curve with rising real interest rates. Tracking difference between the Fund’s NAV and the Underlying Index for the 12-month period was -15 bps, reflective of the Fund’s management fee (-18 bps), duration and yield curve positioning (+2 bps), security selection (+1 bps), trading costs (-2 bps), and other factors (+2 bps).

 

2 

The ICE BofA MOVE Index measures U.S. bond market volatility by tracking a basket of OTC options on U.S. interest rate swaps.

 

3 

A yield curve is constructed by plotting a session’s final yields for various maturities including 1-month, 3-month, 6-month, 1-year, 2-year, 3-year, 5-year, 7-year, 10-year, 20-year, and 30-year maturities.

 

4 

Bloomberg. In this analysis we are making a comparison between the difference in the nominal yield and real yield rates of the 1-year, 5-year, 10-year and 30-year maturities using data available as of October 31, 2022 and October 31, 2023.

 

5 

A unit that is equal to 1/100th of 1% and is used to denote the change in a financial instrument.

 

6 

The Bloomberg US Treasury Inflation Notes: 1-10 Year Index (Series-B) measures the performance of the US Treasury Inflation Protected Securities (TIPS) market with less than 10 years to maturity.

 

46    FLEXSHARES ANNUAL REPORT  


Table of Contents

CUMULATIVE PERFORMANCE

Through October 31, 2023

 

LOGO

 

AVERAGE ANNUAL TOTAL RETURN

For the period ended October 31, 2023

 

    1 Year     5 Year     10 Year     Fund
Inception
9/19/2011
 
 

 

 

 

FlexShares iBoxx 5-Year Target Duration TIPS Index Fund (Based on Net Asset Value)

    -0.11     2.61     1.47     1.46

FlexShares iBoxx 5-Year Target Duration TIPS Index Fund (Based on Market Price)

    -0.15     2.61     1.48     1.46

iBoxx 5-Year Target Duration TIPS Index

    0.19     2.85     1.64     1.63

 

All data as of 10/31/23. Total returns based on market price do not include brokerage commissions that may be payable on secondary market transactions. If brokerage commissions were included, these returns would be lower. Total returns based on market price and net asset value (“NAV”) assume that dividends and capital gain distributions have been reinvested in the Fund at market price and NAV, respectively. NAV is calculated by dividing the total value of all the securities in the Fund’s portfolio plus cash, interest and receivables less any liabilities by the number of Fund shares outstanding. Market price is determined by the midpoint of the bid/ask spread at 4:00 p.m. Eastern Time from the primary listing exchange. Market price returns may vary from NAV returns.

 

Performance quoted represents past performance and does not guarantee future results. The graph and table do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption or sale of Fund shares. Unlike the index that the Fund seeks to track, the Fund’s total returns are reduced by operating expenses, such as transaction costs and management fees. An investor cannot invest directly in an index.

 

Performance reflects contractual reimbursements in effect until March 1, 2024. In the absence of such reimbursements, performance would be reduced. The gross expense ratio of the Fund is 0.19% and the net expense ratio is 0.18%. The gross and net expense ratios disclosed are as reported in the Fund’s prospectus, which may differ from the gross and net expense ratios presented in the Fund’s financial reports. Current performance may be higher or lower than performance shown. Investment return and the principal value of an investment will fluctuate. Shares may be worth more or less than original cost when redeemed or sold in the market.

 

FlexShares ETFs’ performance data current to the most recent month-end is available at www.flexshares.com.

 

PORTFOLIO ANALYSIS

 

The Fund seeks to provide investment results that, before fees and expenses, correspond generally to the price and yield performance of the iBoxx 5-Year Target Duration TIPS Index (the “Underlying Index”). The Underlying Index is designed to reflect the performance of a selection of inflation protected public obligations of the U.S. Treasury, commonly known as “TIPS”, with a targeted average modified adjusted duration1, as defined by S&P Dow Jones Indices LLC as the index provider, of approximately five years. The Underlying Index includes publicly issued TIPS that have maturity dates of at least three years but not more than twenty years from an index rebalancing date. As of October 31, 2023, there were 25 TIPS in the Underlying Index. Northern Trust Investments, Inc. (“NTI”) uses a “passive” or indexing approach to achieve the Fund’s investment objective. NTI generally intends to replicate the constituent securities of the Underlying Index to manage the Fund but may use representative sampling in certain circumstances. “Representative sampling” means investing in a representative sample of securities that collectively has an investment profile similar to the Underlying Index. When the Fund uses representative sampling, it may or may not hold all of the securities that are included in the Underlying Index.

 

In the beginning of the fiscal year ending October 31, 2023, fixed income investments moved higher coming off extremely depressed levels, as market implied odds over a soft landing versus hard landing fluctuated. The beginning of the 2023 calendar year saw fixed income assets continue to post positive results despite significant interest rate volatility. Ultimately, the 2-year and 10-year treasury yields dropped in parallel down 0.40% in Q1 of 2023, while the U.S. Federal Reserve (the “Fed”) raised the Fed Funds rate twice. Overall, the markets entered a period of extreme volatility in March of 2023, following the regional banking disruptions as well as a rescue of a Swiss Bank. The ICE

 

   FLEXSHARES ANNUAL REPORT     47  

 

FlexShares® iBoxx   MANAGEMENT’S DISCUSSION OF FUND PERFORMANCE

5-Year Target Duration TIPS Index Fund Ticker:   TDTF

 

 

1 

The duration calculated from the real modified duration of a TIPS security, adjusted for the market’s estimated beta for a TIPS security versus a nominal Treasury security due to the actual and expected changes in inflation.


Table of Contents

PORTFOLIO ANALYSIS (cont.)

 

BofA MOVE Index2, which measures bond market volatility, spiked on March 15, 2023 to a price of 198, which was a level last seen during the Great Financial Crisis. As Q1 of 2023 came to a close, fixed income investments rallied as investors sought relative safety, and systemic banking concerns were diminishing.

 

By the summer of 2023, treasury rates increased as inflation remained elevated as strength persisted in the U.S. labor market amidst the rising rate environment. During Q2 of 2023, the 2-year treasury yields rose 0.87%, the 10-year treasury yields rose 0.37%, and the 30-year treasury yields rose by 0.21%. While the Fed did hike rates heading into the summer, they chose to pause in June of 2023. Inflation remained elevated into Q3 of 2023, and the labor market remained resilient. The Fed left rates unchanged at their September 2023 meeting, though market participants interpreted that decision as a hawkish pause to allow time to further evaluate the influence of the overall tightening on the U.S. economy. Treasuries sold off throughout Q3 of 2023, specifically in the middle to long end of the yield curve3 with 10-year and 30-year treasury yields rising to 4.57% and 4.70%, respectively.

 

During October of 2023, fixed income investments were under pressure as we observed a continuation in the rise of interest rates, which we believe was driven not by the changing expectations for inflation or the Fed, but instead an increase in the required term premium, or the compensation that investors require for bearing the risk that interest rates may change over the life of the bond, given economic uncertainty and interest rate volatility.

TIPS inflation breakeven4 spreads moved lower during the fiscal year as investors weighed the impact of Fed actions and geopolitical events on future inflation potential. Headline inflation measures receded, though core services components remained elevated. The disinflationary period post the pandemic-era inflation shocks coincided with longer-term, structural forces such as labor market demographics, supply chain orientation, and green transition. Inflation expectations diminished, but remained modestly elevated against Fed policy levels. By the end of the fiscal year 2023, the 12-month change in TIPs breakeven spreads were: 1-year: -50 basis points (“bps”) 5, 5-year: -28 bps, 10-year: -10 bps and 30-year: -2 bps.

 

Rising real interest rates, or an interest rate that has been adjusted for inflation, during the fiscal year led to nearly flat total return performance for both the Fund and the Underlying Index. For the 12-month period, the NAV performance of the Fund outperformed the Bloomberg U.S. TIPS 1-10 Year Index6 by 61 bps against the backdrop of rising real interest rates. Tracking difference between the Fund’s NAV and the Underlying Index for the 12-month period was -30 bps, reflective of the Fund’s management fee (-18 bps), duration and yield curve positioning (+2 bps), security selection (-2 bp), trading costs (-3 bps), and other factors (-9 bps).

 

The iBoxx 5-Year Target Duration TIPS Index is the intellectual property (including registered trademarks) of Markit iBoxx and/or its licensors (“Licensors”), which is used under license. The securities based on the Index are in no way sponsored, endorsed, sold or promoted by Markit iBoxx and its Licensors and neither of the Licensors shall have any liability with respect thereto.

2 

The ICE BofA MOVE Index measures U.S. bond market volatility by tracking a basket of OTC options on U.S. interest rate swaps.

 

3 

A yield curve is constructed by plotting a session’s final yields for various maturities including 1-month, 3-month, 6-month, 1-year, 2-year, 3-year, 5-year, 7-year, 10-year, 20-year, and 30-year maturities.

4 

Bloomberg. In this analysis we are making a comparison between the difference in the nominal yield and real yield rates of the 1-year, 5-year, 10-year and 30-year maturities using data available as of October 31, 2022 and October 31, 2023.

 

5

A unit that is equal to 1/100th of 1% and is used to denote the change in a financial instrument.

 

6

The Bloomberg US Treasury Inflation Linked Bond Index (Series-L) measures the performance of the US Treasury Inflation Protected Securities (TIPS) market.

 

48    FLEXSHARES ANNUAL REPORT  

 

FlexShares® iBoxx   MANAGEMENT’S DISCUSSION OF FUND PERFORMANCE

5-Year Target Duration TIPS Index Fund (cont.)

 


Table of Contents

 

FlexShares® Disciplined   MANAGEMENT’S DISCUSSION OF FUND PERFORMANCE

Duration MBS Index Fund Ticker:   MBSD

 

 

CUMULATIVE PERFORMANCE

Through October 31, 2023

 

LOGO

 

AVERAGE ANNUAL TOTAL RETURN

For the period ended October 31, 2023

 

    1 Year     3 Year     5 Year     Fund
Inception
9/3/2014
 
 

 

 

 

FlexShares Disciplined Duration MBS Index Fund
(Based on Net Asset Value)

    0.98     -4.01     -0.02     0.35

FlexShares Disciplined Duration MBS Index Fund
(Based on Market Price)

    1.13     -3.99     -0.06     0.36

ICE BofA® Constrained Duration US Mortgage Backed Securities IndexSM

    1.57     -3.28     0.52     0.84

 

All data as of 10/31/23. Total returns based on market price do not include brokerage commissions that may be payable on secondary market transactions. If brokerage commissions were included, these returns would be lower. Total returns based on market price and net asset value (“NAV”) assume that dividends and capital gain distributions have been reinvested in the Fund at market price and NAV, respectively. NAV is calculated by dividing the total value of all the securities in the Fund’s portfolio plus cash, interest and receivables less any liabilities by the number of Fund shares outstanding. Market price is determined by the midpoint of the bid/ask spread at 4:00 p.m. Eastern Time from the primary listing exchange. Market price returns may vary from NAV returns.

 

Performance quoted represents past performance and does not guarantee future results. The graph and table do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption or sale of Fund shares. Unlike the index that the Fund seeks to track, the Fund’s total returns are reduced by operating expenses, such as transaction costs and management fees. An investor cannot invest directly in an index.

 

Performance reflects contractual reimbursements in effect until March 1, 2024. In the absence of such reimbursements, performance would be reduced. The gross expense ratio of the Fund is 0.21% and the net expense ratio is 0.20%. The gross and net expense ratios disclosed are as reported in the Fund’s prospectus, which may differ from the gross and net expense ratios presented in the Fund’s financial reports. Current performance may be higher or lower than performance shown. Investment return and the principal value of an investment will fluctuate. Shares may be worth more or less than original cost when redeemed or sold in the market.

 

FlexShares ETFs’ performance data current to the most recent month-end is available at www.flexshares.com.

 

PORTFOLIO ANALYSIS

 

The Fund seeks to provide investment results that correspond generally to the price and yield performance, before fees and expenses, of the ICE BofA® Constrained Duration US Mortgage Backed Securities Index (the “Underlying Index”). The Underlying Index is designed to reflect the performance of a selection of investment-grade US agency residential mortgage-backed pass-through securities (“MBS”). Pursuant to the Underlying Index’s methodology, the Underlying Index constituents are capitalization-weighted, based on their outstanding face value times price plus accrued interest, adjusted by the index provider to achieve an effective duration1 that is generally between 3.25 and 4.25 years. As of October 31, 2023, there were 117 securities in the Underlying Index. Northern Trust Investments, Inc. (“NTI”) uses a “passive” or indexing approach to try to achieve the Fund’s investment objective. NTI uses a representative sampling strategy to manage the Fund. This means that the Fund invests in a representative sample of securities that collectively has an investment profile similar to the Underlying Index. The Fund may or may not hold all of the securities that are included in the Underlying Index.

 

In the beginning of the fiscal year ending October 31, 2023, fixed income investments moved higher coming off extremely depressed levels, as market implied odds over a soft landing versus hard landing fluctuated. The beginning of the 2023 calendar year saw fixed income assets continue to post positive results despite significant interest rate volatility. Ultimately, the 2-year and 10-year treasury yields dropped in parallel down 0.40% in Q1 of 2023, while the U.S. Federal Reserve (the “Fed”) raised the Fed Funds rate twice. Overall, the markets entered a period

 

   FLEXSHARES ANNUAL REPORT     49  
1 

Effective duration provides a measure of a fund’s interest-rate sensitivity and the longer a fund’s duration, the more sensitive the fund is to shifts in interest rates. Duration also gives an indication of how a fund’s NAV will change as interest rates change. A fund with a five-year duration would be expected to lose 5% of its NAV if interest rates rose by 1 percentage point or gain 5%, if interest rates fell by 1 percentage point. Morningstar surveys fund companies for this information.


Table of Contents

 

FlexShares® Disciplined   MANAGEMENT’S DISCUSSION OF FUND PERFORMANCE

Duration MBS Index Fund (cont.)

 

 

PORTFOLIO ANALYSIS(cont.)

 

of extreme volatility in March of 2023, following the regional banking disruptions as well as a rescue of a Swiss Bank. The ICE BofA MOVE Index2, which measures bond market volatility, spiked on March 15, 2023 to a price of 198, which was a level last seen during the Great Financial Crisis. As Q1 of 2023 came to a close, fixed income investments rallied as investors sought relative safety, and systemic banking concerns were diminishing.

 

By the summer of 2023, treasury rates increased as inflation remained elevated as strength persisted in the U.S. labor market amidst the rising rate environment. During Q2 of 2023, the 2 year treasury yields rose 0.87%, the 10-year treasury yields rose 0.37%, and the 30-year treasury yields rose by 0.21%. While the Fed did hike rates heading into the summer, they chose to pause in June of 2023. Inflation remained elevated into Q3 of 2023, and the labor market remained resilient. The Fed left rates unchanged at their September 2023 meeting, though market participants interpreted that decision as a hawkish pause to allow time to further evaluate the influence of the overall tightening on the U.S. economy. Treasuries sold off throughout Q3 of 2023, specifically in the middle to long end of the yield curve3 with 10-year and 30-year treasury yields rising to 4.57% and 4.70%, respectively.

 

During October of 2023, fixed income investments were under pressure as we observed a continuation in the rise of interest rates, which we believe was driven not by the changing expectations for inflation or the Fed, but instead an increase in the required term premium, or the compensation that investors require for bearing the risk that interest rates may change over the life of the bond, given economic uncertainty and interest rate volatility.

The average 30-year mortgage rates (Freddie Mac Index4) dipped to 5.95% in January of 2023, and subsequently rose the remainder of the fiscal year to finish at 7.79%.

 

Despite rising interest rates and an inverted yield curve during the fiscal year, the Fund and the Underlying Index achieved a positive total return. For the 12-month period, the NAV performance of the Fund outperformed the Bloomberg U.S. Mortgage Backed Securities Index5 by 180 basis points (“bps”)6 due to the Underlying Index’s exposure to a selection of higher coupon7, more seasoned MBS securities, which were both higher yielding and shorter duration and outperformed the newer MBS that skewed heavily toward lower coupon and longer duration. Tracking difference between the Fund’s NAV and the Underlying Index’s total return for the 12-month period was -59 bps, reflective of the Fund’s management fee (-20 bps), trading costs and fees (-46 bps), yield curve positioning (+23 bps), sector allocation (+3 bps), security selection (-74 bps), and other factors (+55 bps).

 

The ICE BofA® Constrained Duration US Mortgage Backed Securities Index is the intellectual property (including registered trademarks) of ICE BofA® and/or its licensors ("Licensors"), which is used under license. The securities based on the Index are in no way sponsored, endorsed, sold or promoted by ICE BofA® and its Licensors and neither of the Licensors shall have any liability with respect thereto.

 

2 

The ICE BofA MOVE Index measures U.S. bond market volatility by tracking a basket of OTC options on U.S. interest rate swaps.

 

3 

A yield curve is constructed by plotting a session’s final yields for various maturities including 1-month, 3-month, 6-month, 1-year, 2-year, 3-year, 5-year, 7-year, 10-year, 20-year, and 30-year maturities.

 

4

Source: Bloomberg, Freddie Mac US Mortgage Market Survey 30 Year Homeowner Commitment National. October 31, 2022 through November 1, 2023.

 

5 

The Bloomberg U.S. Mortgage Backed Securities Index tracks fixed-rate agency mortgage backed passthrough securities guaranteed by Ginnie Mae (GNMA), Fannie Mae (FNMA), and Freddie Mac (FHLMC).

 

6 

A unit that is equal to 1/100th of 1% and is used to denote the change in a financial instrument.

 

7 

A coupon or coupon payment is the annual interest rate paid on a bond, expressed as a percentage of the face value and paid from issue date until maturity.

 

50    FLEXSHARES ANNUAL REPORT  


Table of Contents

 

FlexShares® Credit-Scored   MANAGEMENT’S DISCUSSION OF FUND PERFORMANCE

US Corporate Bond Index Fund Ticker:  SKOR

 

 

CUMULATIVE PERFORMANCE

Through October 31, 2023

 

LOGO

 

*

The hybrid index performance information reflects the performance of the Northern Trust Credit-Scored US Corporate Bond IndexSM (Previous Index) through April 30, 2020 and the Northern Trust US Corporate Bond Quality Value IndexSM thereafter. The Previous Index terminated as of May 1, 2020.

 

AVERAGE ANNUAL TOTAL RETURN

For the period ended October 31, 2023

 

    1 Year     3 Year     5 Year     Fund
Inception
11/12/2014
 
 

 

 

 

FlexShares Credit-Scored US Corporate Bond Index Fund (Based on Net Asset Value)

    3.92     -3.05     1.76     1.76

FlexShares Credit-Scored US Corporate Bond Index Fund (Based on Market Price)

    3.94     -3.00     1.77     1.78

Bloomberg Intermediate U.S. Corporate Index

    3.75     -2.82     1.53     1.74

Hybrid Northern Trust Credit-Scored US Corporate Bond IndexSM/Northern Trust US Corporate Bond Quality Value IndexSM

    4.41     -2.49     2.31 %*      2.50 %* 

 

All data as of 10/31/23. Total returns based on market price do not include brokerage commissions that may be payable on secondary market transactions. If brokerage commissions were included, these returns would be lower. Total returns based on market price and net asset value (“NAV”) assume that dividends and capital gain distributions have been reinvested in the Fund at market price and NAV, respectively. NAV is calculated by dividing the total value of all the securities in the Fund’s portfolio plus cash, interest and receivables less any liabilities by the number of Fund shares outstanding. Market price is determined by the midpoint of the bid/ask spread at 4:00 p.m. Eastern Time from the primary listing exchange. Market price returns may vary from NAV returns.

 

Performance quoted represents past performance and does not guarantee future results. The graph and table do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption or sale of Fund shares. Unlike the index that the Fund seeks to track, the Fund’s total returns are reduced by operating expenses, such as transaction costs and management fees. An investor cannot invest directly in an index.

 

Performance reflects contractual reimbursements in effect until March 1, 2024. In the absence of such reimbursements, performance would be reduced. The gross expense ratio of the Fund is 0.23% and the net expense ratio is 0.22%. The gross and net expense ratios disclosed are as reported in the Fund’s prospectus, which may differ from the gross and net expense ratios presented in the Fund’s financial reports. Current performance may be higher or lower than performance shown. Investment return and the principal value of an investment will fluctuate. Shares may be worth more or less than original cost when redeemed or sold in the market.

 

FlexShares ETFs’ performance data current to the most recent month-end is available at www.flexshares.com.

 

PORTFOLIO ANALYSIS

 

The Fund seeks to provide investment results that correspond generally to the price and yield performance, before fees and expenses, of the Northern Trust US Corporate Bond Quality Value IndexSM (the “Underlying Index”). The Underlying Index is designed to reflect the performance of a diversified universe of intermediate maturity, US-dollar denominated bonds of companies with investment grade credit quality, favorable valuations, and enhanced short-term and long-term solvency. As of October 31, 2023, there were 2,851 issues in the Underlying Index. Northern Trust Investments, Inc. (“NTI”) uses a “passive” or indexing approach to try to achieve the Fund’s investment objective. NTI uses a representative sampling strategy to manage the Fund. This means that the Fund invests in a representative sample of securities that collectively has an investment profile similar to the Underlying Index. The Fund may or may not hold all of the securities that are included in the Underlying Index.

 

In the beginning of the fiscal year ending October 31, 2023, fixed income investments moved higher coming off extremely depressed levels, as market implied odds over a soft landing versus hard landing fluctuated. The beginning of the 2023 calendar year saw fixed income assets continue to post positive results despite significant interest rate volatility. Ultimately, the 2-year and 10-year treasury yields dropped in parallel down 0.40% in Q1 of 2023, while the U.S. Federal Reserve (the “Fed”) raised the Fed Funds rate twice. Overall, the markets entered a period of extreme volatility in March of 2023, following the regional banking disruptions as well as a rescue of a Swiss Bank. The ICE BofA MOVE Index1, which measures bond market volatility, spiked on March 15, 2023 to a price of 198, which was a level last seen during the Great Financial Crisis. As Q1 of 2023 came to a close, fixed income investments rallied as investors sought relative safety, and systemic banking concerns were diminishing.

 

1 

The ICE BofA MOVE Index measures U.S. bond market volatility by tracking a basket of OTC options on U.S. interest rate swaps.

 

   FLEXSHARES ANNUAL REPORT     51  


Table of Contents

 

FlexShares® Credit-Scored   MANAGEMENT’S DISCUSSION OF FUND PERFORMANCE

US Corporate Bond Index Fund (cont.)

 

 

PORTFOLIO ANALYSIS (cont.)

 

By the summer of 2023, treasury rates increased as inflation remained elevated as strength persisted in the U.S. labor market amidst the rising rate environment. During Q2 of 2023, the 2-year treasury yields rose 0.87%, the 10-year treasury yields rose 0.37%, and the 30-year treasury yields rose by 0.21%. While the Fed did hike rates heading into the summer, they chose to pause in June of 2023. Inflation remained elevated into Q3 of 2023, and the labor market remained resilient. The Fed left rates unchanged at their September 2023 meeting, though market participants interpreted that decision as a hawkish pause to allow time to further evaluate the influence of the overall tightening on the U.S. economy. Treasuries sold off throughout Q3 of 2023, specifically in the middle to long end of the yield curve2 with 10-year and 30-year treasury yields rising to 4.57% and 4.70%, respectively.

 

During October of 2023, fixed income investments were under pressure as we observed a continuation in the rise of interest rates, which we believe was driven not by the changing expectations for inflation or the Fed, but instead an increase in the required term premium, or the compensation that investors require for bearing the risk that interest rates may change over the life of the bond, given economic uncertainty and interest rate volatility.

 

Credit fundamentals remained relatively stable throughout the year as the U.S. economy was resilient, and fears of a recession seemed to subside or at least pushed out further into the future. Investment grade credit spreads3 generally tightened throughout the fiscal year with a short-lived spike wider in March of 2023. The option adjusted spread (“OAS”)4 of the Bloomberg U.S. Credit Index5 peaked at 150 basis points

(“bps”)6 on March 15, 2023 amidst the extreme market volatility centered around regional bank uncertainty, then declined to a low of 104 bps at the end of July 2023. OAS then held relatively steady around these period low levels until October of 2023, which saw spreads mildly widen back out to finish the fiscal year at 119 bps. Credit spreads in the U.S. high yield7 market followed a similar path, as investment grade spreads during the fiscal year spiked up to 520 bps in March, measured by the OAS of the ICE BofA U.S. High Yield Index8. High yield spreads then tightened to a period low at the end of July 2023, and subsequently widened gently to finish the fiscal year at 448 bps.

 

During the fiscal year, the Fund’s NAV outperformed the Bloomberg U.S. Intermediate Corporate Bond Index9 by 17 bps. Overall, credit performed well as investment grade spreads generally tightened throughout the trailing 12-month period. The Fund is designed to be sector neutral with performance predominantly driven by security selection within sectors and industries. The tracking difference between the Fund’s NAV and the Underlying Index’s total return for the period was -49 bps, which is reflective of the Fund’s management fee (-22 bps), trading costs (-15 bps), sampling (-15 bps), and other factors (+3 bps).

2 

A yield curve is constructed by plotting a session’s final yields for various maturities including 1-month, 3-month, 6-month, 1-year, 2-year, 3-year, 5-year, 7-year, 10-year, 20-year, and 30-year maturities.

 

3 

Credit spread is the difference in yield between one debt security and another debt security with the same maturity but of lesser quality.

 

4 

The option-adjusted spread (OAS) is the measurement of the spread of a fixed-income security rate or portfolio and typically the Treasury securities yield (often referred to as the riskfree rate) and that spread is added to the fixed-income security for comparison purposes.

 

5 

Bloomberg U.S. Credit Index measures the investment grade, US dollar-denominated, taxable corporate and government related bond markets.

6 

A unit that is equal to 1/100th of 1% and is used to denote the change in a financial instrument.

 

7 

High yield are fixed income securities that are rated in the middle rating of Moody’s, Fitch and S&P is Ba1/BB+/BB+ or below.

 

8 

The ICE BofA US High Yield Index is market capitalization weighted and is designed to measure the performance of U.S. dollar denominated below investment grade (commonly referred to as “junk”) corporate debt publicly issued in the U.S. domestic market.

 

9

Bloomberg U.S. Intermediate Corporate Bond Index measures the investment grade, fixedrate, taxable corporate bond market that have between 1 and up to, but not including, 10 years to maturity.

 

52    FLEXSHARES ANNUAL REPORT  


Table of Contents

 

FlexShares® Credit-Scored   MANAGEMENT’S DISCUSSION OF FUND PERFORMANCE

US Long Corporate Bond Index Fund Ticker:  LKOR

 

 

CUMULATIVE PERFORMANCE

Through October 31, 2023

 

LOGO

 

*

The hybrid index performance information reflects the performance of the Northern Trust Credit-Scored US Long Corporate Bond IndexSM (Previous Index) through April 30, 2020 and the Northern Trust US Long Corporate Bond Quality Value IndexSM thereafter. The Previous Index terminated as of May 1, 2020.

 

AVERAGE ANNUAL TOTAL RETURN

For the period ended October 31, 2023

 

    1 Year     3 Year     5 Year     Fund
Inception
9/23/2015
 
 

 

 

 

FlexShares Credit-Scored US Long Corp Bond Index Fund (Based on Net Asset Value)

    1.59     -9.92     0.24     1.33

FlexShares Credit-Scored US Long Corp Bond Index Fund (Based on Market Price)

    1.26     -9.84     0.34     1.34

Bloomberg Long U.S. Corporate Index

    0.50     -10.18     -0.28     1.20

Hybrid Northern Trust Credit-Scored US Long Corporate Bond IndexSM/Northern Trust US Long Corporate Bond Quality Value IndexSM

    2.38     -9.30     1.04 %*      2.28 %* 

 

All data as of 10/31/23. Total returns based on market price do not include brokerage commissions that may be payable on secondary market transactions. If brokerage commissions were included, these returns would be lower. Total returns based on market price and net asset value (“NAV”) assume that dividends and capital gain distributions have been reinvested in the Fund at market price and NAV, respectively. NAV is calculated by dividing the total value of all the securities in the Fund’s portfolio plus cash, interest and receivables less any liabilities by the number of Fund shares outstanding. Market price is determined by the midpoint of the bid/ask spread at 4:00 p.m. Eastern Time from the primary listing exchange. Market price returns may vary from NAV returns.

 

Performance quoted represents past performance and does not guarantee future results. The graph and table do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption or sale of Fund shares. Unlike the index that the Fund seeks to track, the Fund’s total returns are reduced by operating expenses, such as transaction costs and management fees. An investor cannot invest directly in an index.

 

Performance reflects contractual reimbursements in effect until March 1, 2024. In the absence of such reimbursements, performance would be reduced. The gross expense ratio of the Fund is 0.23% and the net expense ratio is 0.22%. The gross and net expense ratios disclosed are as reported in the Fund’s prospectus, which may differ from the gross and net expense ratios presented in the Fund’s financial reports. Current performance may be higher or lower than performance shown. Investment return and the principal value of an investment will fluctuate. Shares may be worth more or less than original cost when redeemed or sold in the market.

 

FlexShares ETFs’ performance data current to the most recent month-end is available at www.flexshares.com.

 

PORTFOLIO ANALYSIS

 

The Fund seeks to provide investment results that correspond generally to the price and yield performance, before fees and expenses, of the Northern Trust US Long Corporate Bond Quality Value IndexSM (the “Underlying Index”). The Underlying Index is designed to reflect the performance of a diversified universe of longer term maturity, US-dollar denominated bonds of companies with investment grade credit quality, favorable valuations, and enhanced short-term and long-term solvency. As of October 31, 2023, there were 1,463 issues in the Underlying Index. Northern Trust Investments, Inc. (“NTI”) uses a “passive” or indexing approach to try to achieve the Fund’s investment objective. NTI uses a representative sampling strategy to manage the Fund. This means that the Fund invests in a representative sample of securities that collectively has an investment profile similar to the Underlying Index. The Fund may or may not hold all of the securities that are included in the Underlying Index.

 

In the beginning of the fiscal year ending October 31, 2023, fixed income investments moved higher coming off extremely depressed levels, as market implied odds over a soft landing versus hard landing fluctuated. The beginning of the 2023 calendar year saw fixed income assets continue to post positive results despite significant interest rate volatility. Ultimately, the 2-year and 10-year treasury yields dropped in parallel down 0.40% in Q1 of 2023, while the U.S. Federal Reserve (the “Fed”) raised the Fed Funds rate twice. Overall, the markets entered a period of extreme volatility in March of 2023, following the regional banking disruptions as well as a rescue of a Swiss Bank. The ICE BofA MOVE Index1, which measures bond market volatility, spiked on March 15, 2023 to a price of 198, which was a level last seen during the Great Financial Crisis. As Q1 of 2023 came to a close, fixed income investments rallied as investors sought relative safety, and systemic banking concerns were diminishing.

 

By the summer of 2023, treasury rates increased as inflation remained elevated as

 

1 

The ICE BofA MOVE Index measures U.S. bond market volatility by tracking a basket of OTC options on U.S. interest rate swaps.

 

   FLEXSHARES ANNUAL REPORT     53  


Table of Contents

 

FlexShares® Credit-Scored   MANAGEMENT’S DISCUSSION OF FUND PERFORMANCE

US Long Corporate Bond Index Fund (cont.)

 

 

PORTFOLIO ANALYSIS (cont.)

 

strength persisted in the U.S. labor market amidst the rising rate environment. During Q2 of 2023, the 2-year treasury yields rose 0.87%, the 10-year treasury yields rose 0.37%, and the 30-year treasury yields rose by 0.21%. While the Fed did hike rates heading into the summer, they chose to pause in June of 2023. Inflation remained elevated into Q3 of 2023, and the labor market remained resilient. The Fed left rates unchanged at their September 2023 meeting, though market participants interpreted that decision as a hawkish pause to allow time to further evaluate the influence of the overall tightening on the U.S. economy. Treasuries sold off throughout Q3 of 2023, specifically in the middle to long end of the yield curve2 with 10-year and 30-year treasury yields rising to 4.57% and 4.70%, respectively.

 

During October of 2023, fixed income investments were under pressure as we observed a continuation in the rise of interest rates, which we believe was driven not by the changing expectations for inflation or the Fed, but instead an increase in the required term premium, or the compensation that investors require for bearing the risk that interest rates may change over the life of the bond, given economic uncertainty and interest rate volatility.

 

Credit fundamentals remained relatively stable throughout the year as the U.S. economy was resilient, and fears of a recession seemed to subside or at least pushed out further into the future. Investment grade credit spreads3 generally tightened throughout the fiscal year with a short-lived spike wider in March of 2023. The option adjusted spread (“OAS”)4 of the Bloomberg U.S. Credit Index5 peaked at 150 basis points (“bps”)6

on March 15, 2023 amidst the extreme market volatility centered around regional bank uncertainty, then declined to a low of 104 bps at the end of July 2023. OAS then held relatively steady around these period low levels until October of 2023, which saw spreads mildly widen back out to finish the fiscal year at 119 bps. Credit spreads in the U.S. high yield7 market followed a similar path, as investment grade spreads during the fiscal year spiked up to 520 bps in March, measured by the OAS of the ICE BofA U.S. High Yield Index8. High yield spreads then tightened to a period low at the end of July 2023, and subsequently widened gently to finish the fiscal year at 448 bps.

 

During the fiscal year, the Fund’s NAV outperformed the Bloomberg U.S. Long Corporate Bond Index9 by 109 bps. Overall, credit performed well as investment grade spreads generally tightened throughout the trailing 12-month period. The Fund is designed to be sector neutral with performance predominantly driven by security selection within sectors and industries. The tracking difference between the Fund’s NAV and the Underlying Index’s total return for the period was -79 bps, which is reflective of the Fund’s management fee (-22 bps), trading costs (-19 bps), sampling (-33 bps), and other factors (-5 bps).

 

2 

A yield curve is constructed by plotting a session’s final yields for various maturities including 1-month, 3-month, 6-month, 1-year, 2-year, 3-year, 5-year, 7-year, 10-year, 20-year, and 30-year maturities.

 

3 

Credit spread is the difference in yield between one debt security and another debt security with the same maturity but of lesser quality.

 

4 

The option-adjusted spread (OAS) is the measurement of the spread of a fixed-income security rate or portfolio and typically the Treasury securities yield (often referred to as the riskfree rate) and that spread is added to the fixed-income security for comparison purposes.

 

5 

Bloomberg U.S. Credit Index measures the investment grade, US dollar-denominated, taxable corporate and government related bond markets.

 

6 

A unit that is equal to 1/100th of 1% and is used to denote the change in a financial instrument.

 

7 

High yield are fixed income securities that are rated in the middle rating of Moody’s, Fitch and S&P is Ba1/BB+/BB+ or below.

 

8

The ICE BofA US High Yield Index is market capitalization weighted and is designed to measure the performance of U.S. dollar denominated below investment grade (commonly referred to as “junk”) corporate debt publicly issued in the U.S. domestic market.

 

9 

Bloomberg U.S. Long Corporate Bond Index measures the investment grade, fixed-rate, taxable corporate bond market that have a maturity of greater than or equal to 10 years.

 

54    FLEXSHARES ANNUAL REPORT  


Table of Contents

 

FlexShares® High Yield   MANAGEMENT’S DISCUSSION OF FUND PERFORMANCE

Value-Scored Bond Index Fund Ticker:  HYGV

 

 

CUMULATIVE PERFORMANCE

Through October 31, 2023

 

LOGO

 

AVERAGE ANNUAL TOTAL RETURN

For the period ended October 31, 2023

 

    1 Year     3 Year     5 Year    

Fund
Inception

7/17/2018

 
 

 

 

 

FlexShares High Yield Value-Scored US Bond Index Fund (Based on Net Asset Value)

    5.45     1.30     2.85     2.73

FlexShares High Yield Value-Scored US Bond Index Fund (Based on Market Price)

    5.48     1.28     2.89     2.76

ICE BofA® US High Yield Index

    5.82     1.24     2.88     2.76

Northern Trust High Yield Value-Scored US Corporate Bond IndexSM

    7.14     2.50     4.27     4.11

 

All data as of 10/31/23. Total returns based on market price do not include brokerage commissions that may be payable on secondary market transactions. If brokerage commissions were included, these returns would be lower. Total returns based on market price and net asset value (“NAV”) assume that dividends and capital gain distributions have been reinvested in the Fund at market price and NAV, respectively. NAV is calculated by dividing the total value of all the securities in the Fund’s portfolio plus cash, interest and receivables less any liabilities by the number of Fund shares outstanding. Market price is determined by the midpoint of the bid/ask spread at 4:00 p.m. Eastern Time from the primary listing exchange. Market price returns may vary from NAV returns.

 

Performance quoted represents past performance and does not guarantee future results. The graph and table do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption or sale of Fund shares. Unlike the index that the Fund seeks to track, the Fund’s total returns are reduced by operating expenses, such as transaction costs and management fees. An investor cannot invest directly in an index.

 

Performance reflects contractual reimbursements in effect until March 1, 2024. In the absence of such reimbursements, performance would be reduced. The gross expense ratio of the Fund is 0.38% and the net expense ratio is 0.37%. The gross and net expense ratios disclosed are as reported in the Fund’s prospectus, which may differ from the gross and net expense ratios presented in the Fund’s financial reports. Current performance may be higher or lower than performance shown. Investment return and the principal value of an investment will fluctuate. Shares may be worth more or less than original cost when redeemed or sold in the market.

 

FlexShares ETFs’ performance data current to the most recent month-end is available at www.flexshares.com.

 

PORTFOLIO ANALYSIS

 

The Fund seeks to provide investment results that correspond generally to the price and yield performance, before fees and expenses, of the Northern Trust High Yield Value-Scored US Corporate Bond IndexSM (the “Underlying Index”). The Underlying Index is designed to reflect the performance of a diversified universe of U.S.-dollar denominated bonds of companies exhibiting favorable fundamental qualities, market valuations and liquidity, as defined by Northern Trust Investments, Inc.’s (“NTI”) proprietary scoring models. The securities included in the Underlying Index are a subset of the securities included in the Northern Trust High Yield US Corporate Bond IndexSM (the “Parent Index”) 1. The Underlying Index begins with the Parent Index and then follows a rules-based methodology to select and weight securities, subject to certain constraints, to optimize exposure to a proprietary value score2, credit-score3, and

 

1 

The Northern Trust High Yield US Corporate Bond IndexSM is a market capitalization weighted index comprised of U.S. dollar-denominated high yield corporate bonds.

 

2

The value score has multiple components, including: (a) valuation (e.g., to assess the relative value of the security versus other similar securities); (b) spread analysis (e.g., to assess the risk/return trade-off associated with each security versus other similar securities); and (c) financial solvency (e.g., debt servicing capacity).

 

3

The credit score has three components: (i) management efficiency (e.g., corporate finance activities and corporate governance), (ii) profitability (e.g., reliability and sustainability of financial performance); and (iii) financial solvency.

 

   FLEXSHARES ANNUAL REPORT     55  


Table of Contents

 

FlexShares® High Yield   MANAGEMENT’S DISCUSSION OF FUND PERFORMANCE

Value-Scored Bond Index Fund (cont.)

 

 

PORTFOLIO ANALYSIS (cont.)

 

liquidity score4, each as determined by NTI, acting in its capacity as index provider. The primary objective of the optimization process is to maximize exposure to the value score relative to the Underlying Index’s eligible universe. As of October 31, 2023, there were 952 issues in the Underlying Index. NTI uses a “passive” or indexing approach to try to achieve the Fund’s investment objective. NTI uses a representative sampling strategy to manage the Fund. This means that the Fund invests in a representative sample of securities that collectively has an investment profile similar to the Underlying Index. The Fund may or may not hold all of the securities that are included in the Underlying Index.

 

In the beginning of the fiscal year ending October 31, 2023, fixed income investments moved higher coming off extremely depressed levels, as market implied odds over a soft landing versus hard landing fluctuated. The beginning of the 2023 calendar year saw fixed income assets continue to post positive results despite significant interest rate volatility. Ultimately, the 2-year and 10-year treasury yields dropped in parallel down 0.40% in Q1 of 2023, while the U.S. Federal Reserve (the “Fed”) raised the Fed Funds rate twice. Overall, the markets entered a period of extreme volatility in March of 2023, following the regional banking disruptions as well as a rescue of a Swiss Bank. The ICE BofA MOVE Index5, which measures bond market volatility, spiked on March 15, 2023 to a price of 198, which was a level last seen during the Great Financial Crisis. As Q1 of 2023 came to a close, fixed income investments rallied as investors sought relative safety, and systemic banking concerns were diminishing.

 

By the summer of 2023, treasury rates increased as inflation remained elevated as strength persisted in the U.S. labor market amidst the rising rate environment. During Q2 of 2023, the 2year treasury yields rose 0.87%, the 10-year treasury yields rose 0.37%, and the 30-year treasury yields rose by 0.21%. While the Fed

did hike rates heading into the summer, they chose to pause in June of 2023. Inflation remained elevated into Q3 of 2023, and the labor market remained resilient. The Fed left rates unchanged at their September 2023 meeting, though market participants interpreted that decision as a hawkish pause to allow time to further evaluate the influence of the overall tightening on the U.S. economy. Treasuries sold off throughout Q3 of 2023, specifically in the middle to long end of the yield curve6 with 10-year and 30-year treasury yields rising to 4.57% and 4.70%, respectively.

 

During October of 2023, fixed income investments were under pressure as we observed a continuation in the rise of interest rates, which we believe was driven not by the changing expectations for inflation or the Fed, but instead an increase in the required term premium, or the compensation that investors require for bearing the risk that interest rates may change over the life of the bond, given economic uncertainty and interest rate volatility.

 

Credit fundamentals remained relatively stable throughout the year as the U.S. economy was resilient, and fears of a recession seemed to subside or at least pushed out further into the future. Investment grade credit spreads7 generally tightened throughout the fiscal year with a short-lived spike wider in March of 2023. The option adjusted spread (“OAS”)8 of the Bloomberg U.S. Credit Index9 peaked at 150 basis points

(“bps”)10 on March 15, 2023 amidst the extreme market volatility centered around regional bank uncertainty, then declined to a low of 104 bps at the end of July 2023. OAS then held relatively steady around these period low levels until October of 2023, which saw spreads mildly widen back out to finish the

 

4 

The core components of the proprietary liquidity score are based on a quantitative ranking of security characteristics obtained from company filings. Examples of data sets utilized to determine liquidity include time to maturity (e.g. time until the security reaches its maturity date as measured in in years), total issuer debt outstanding (e.g. the sum of all debt outstanding for a single corporate issuer), and time since original issuance (e.g. the time that has elapsed since the security was originally issued as measured in years).

 

5 

The ICE BofA MOVE Index measures U.S. bond market volatility by tracking a basket of OTC options on U.S. interest rate swaps.

 

6 

A yield curve is constructed by plotting a session’s final yields for various maturities including 1-month, 3-month, 6-month, 1-year, 2-year, 3-year, 5-year, 7-year, 10-year, 20-year, and 30-year maturities.

 

7 

Credit spread is the difference in yield between one debt security and another debt security with the same maturity but of lesser quality.

 

8 

The option-adjusted spread (OAS) is the measurement of the spread of a fixed-income security rate or portfolio and typically the Treasury securities yield (often referred to as the risk-free rate) and that spread is added to the fixed-income security for comparison purposes.

 

9 

Bloomberg U.S. Credit Index measures the investment grade, US dollar-denominated, taxable corporate and government related bond markets.

 

10 

A unit that is equal to 1/100th of 1% and is used to denote the change in a financial instrument.

 

56    FLEXSHARES ANNUAL REPORT  


Table of Contents

 

FlexShares® High Yield   MANAGEMENT’S DISCUSSION OF FUND PERFORMANCE

Value-Scored Bond Index Fund (cont.)

 

 

 

 

 

 

PORTFOLIO ANALYSIS (cont.)

 

fiscal year at 119 bps. Credit spreads in the U.S. high yield11 market followed a similar path, as investment grade spreads during the fiscal year spiked up to 520 bps in March, measured by the OAS of the ICE BofA U.S. High Yield Index12. High yield spreads then tightened to a period low at the end of July 2023, and subsequently widened gently to finish the fiscal year at 448 bps.

 

During the fiscal year, the Fund’s NAV underperformed the ICE® BofA® U.S. High Yield Index by -37 bps. Both the Fund and the market index posted mid-single digit total returns for the fiscal year period. The Fund is designed to be sector neutral with performance predominantly driven by security selection within sectors and industries. The tracking difference between the Fund’s NAV and the Underlying Index’s total return for the period was -169 bps, which is reflective of the Fund’s management fee (-37 bps), trading costs (-53 bps), sampling (-60 bps), and other factors (-19 bps).

 

 

 

11 

High yield are fixed income securities that are rated in the middle rating of Moody’s, Fitch and S&P is Ba1/BB+/BB+ or below.

 

12 

The ICE® BofA® US High Yield Index is market capitalization weighted and is designed to measure the performance of U.S. dollar denominated below investment grade (commonly referred to as “junk”) corporate debt publicly issued in the U.S. domestic market.

 

   FLEXSHARES ANNUAL REPORT     57  


Table of Contents

 

FlexShares® ESG & Climate   MANAGEMENT’S DISCUSSION OF FUND PERFORMANCE

Investment Grade Corporate Core Index Fund  Ticker:  FEIG

 

 

CUMULATIVE PERFORMANCE

Through October 31, 2023

 

LOGO

 

AVERAGE ANNUAL TOTAL RETURN

For the period ended October 31, 2023

 

    1 Year    

Fund

Inception
9/20/2021

 
 

 

 

 

FlexShares ESG & Climate Investment Grade Corporate Core Index Fund (Based on Net Asset Value)

    2.41     -9.43

FlexShares ESG & Climate Investment Grade Corporate Core Index Fund (Based on Market Price)

    2.28     -9.41

Bloomberg US Corporate Total Return Value Unhedged Index

    2.77     -9.16

Northern Trust ESG & Climate Investment Grade U.S. Corporate Core IndexSM

    2.88     -9.12

 

All data as of 10/31/23. Total returns based on market price do not include brokerage commissions that may be payable on secondary market transactions. If brokerage commissions were included, these returns would be lower. Total returns based on market price and net asset value (“NAV”) assume that dividends and capital gain distributions have been reinvested in the Fund at market price and NAV, respectively. NAV is calculated by dividing the total value of all the securities in the Fund’s portfolio plus cash, interest and receivables less any liabilities by the number of Fund shares outstanding. Market price is determined by the midpoint of the bid/ask spread at 4:00 p.m. Eastern Time from the primary listing exchange. Market price returns may vary from NAV returns.

 

Performance quoted represents past performance and does not guarantee future results. The graph and table do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption or sale of Fund shares. Unlike the index that the Fund seeks to track, the Fund’s total returns are reduced by operating expenses, such as transaction costs and management fees. An investor cannot invest directly in an index.

 

Performance reflects contractual reimbursements in effect until March 1, 2024. In the absence of such reimbursements, performance would be reduced. The gross expense ratio of the Fund is 0.13% and the net expense ratio is 0.12%. The gross and net expense ratios disclosed are as reported in the Fund’s prospectus, which may differ from the gross and net expense ratios presented in the Fund’s financial reports. Current performance may be higher or lower than performance shown. Investment return and the principal value of an investment will fluctuate. Shares may be worth more or less than original cost when redeemed or sold in the market.

 

FlexShares ETFs’ performance data current to the most recent month-end is available at www.flexshares.com.

 

PORTFOLIO ANALYSIS

 

The Fund seeks investment results that correspond generally to the price and yield performance, before fees and expenses, of the Northern Trust ESG & Climate Investment Grade U.S. Corporate Core IndexSM (the “Underlying Index”). The Underlying Index is designed to reflect the performance of a selection of U.S.-dollar-denominated corporate bonds issued by companies that exhibit certain environmental, social and governance (“ESG”) characteristics, while also seeking to provide broad-market, core exposure to U.S.-dollar-denominated investment grade corporate bonds of U.S. and non-U.S. issuers. The Underlying Index is designed to minimize tracking differences relative to the Northern Trust US Corporate Bond IndexSM (the “Parent Index”) while also seeking (a) an aggregate higher scoring of certain ESG characteristics, as measured by the Northern Trust ESG Vector Score, and (b) reduction of aggregate climate-related risk, as measured by certain carbon-related risk metrics, each relative to the Parent Index. As of October 31, 2023, there were 3,667 issues in the Underlying Index. Northern Trust Investments, Inc. (“NTI”) uses a “passive” or indexing approach to try to achieve the Fund’s investment objective. NTI uses a representative sampling strategy to manage the Fund. This means that the Fund invests in a representative sample of securities that collectively has an investment profile similar to the Underlying Index. The Fund may or may not hold all of the securities that are included in the Underlying Index.

 

In the beginning of the fiscal year ending October 31, 2023, fixed income investments moved higher coming off extremely depressed levels, as market implied odds over a soft landing versus hard landing fluctuated. The beginning of the 2023 calendar year saw fixed income assets continue to post positive results despite significant interest rate volatility. Ultimately, the 2-year and 10-year treasury yields dropped in parallel down 0.40% in Q1 of 2023, while the U.S. Federal Reserve (the “Fed”) raised the Fed Funds rate twice. Overall, the markets entered a period of extreme volatility in March of 2023, following the regional banking disruptions as well as a rescue of a Swiss Bank. The ICE

 

58    FLEXSHARES ANNUAL REPORT  


Table of Contents

 

FlexShares® ESG & Climate   MANAGEMENT’S DISCUSSION OF FUND PERFORMANCE

Investment Grade Corporate Core Index Fund (cont.)

 

 

PORTFOLIO ANALYSIS (cont.)

 

BofA MOVE Index1, which measures bond market volatility, spiked on March 15, 2023 to a price of 198, which was a level last seen during the Great Financial Crisis. As Q1 of 2023 came to a close, fixed income investments rallied as investors sought relative safety, and systemic banking concerns were diminishing.

 

By the summer of 2023, treasury rates increased as inflation remained elevated as strength persisted in the U.S. labor market amidst the rising rate environment. During Q2 of 2023, the 2year treasury yields rose 0.87%, the 10-year treasury yields rose 0.37%, and the 30-year treasury yields rose by 0.21%. While the Fed did hike rates heading into the summer, they chose to pause in June of 2023. Inflation remained elevated into Q3 of 2023, and the labor market remained resilient. The Fed left rates unchanged at their September 2023 meeting, though market participants interpreted that decision as a hawkish pause to allow time to further evaluate the influence of the overall tightening on the U.S. economy. Treasuries sold off throughout Q3 of 2023, specifically in the middle to long end of the yield curve2 with 10-year and 30-year treasury yields rising to 4.57% and 4.70%, respectively.

 

During October of 2023, fixed income investments were under pressure as we observed a continuation in the rise of interest rates, which we believe was driven not by the changing expectations for inflation or the Fed, but instead an increase in the required term premium, or the compensation that investors require for bearing the risk that interest rates may change over the life of the bond, given economic uncertainty and interest rate volatility.

Credit fundamentals remained relatively stable throughout the year as the U.S. economy was resilient, and fears of a recession seemed to subside or at least pushed out further into the future. Investment grade credit spreads3 generally tightened throughout the fiscal year with a short-lived spike wider in March of 2023. The option adjusted spread (“OAS”)4 of the Bloomberg U.S. Credit Index5 peaked at 150 basis points (“bps”)6 on March 15, 2023 amidst the extreme market volatility centered around regional bank uncertainty, then declined to a low of 104 bps at the end of July 2023. OAS then held relatively steady around these period low levels until October of 2023, which saw spreads mildly widen back out to finish the fiscal year at 119 bps. Credit spreads in the U.S. high yield7 market followed a similar path, as investment grade spreads during the fiscal year spiked up to 520 bps in March, measured by the OAS of the ICE BofA U.S. High Yield Index8. High yield spreads then tightened to a period low at the end of July 2023, and subsequently widened gently to finish the fiscal year at 448 bps.

 

During the fiscal year, the Fund’s NAV underperformed the Bloomberg U.S. Corporate Bond Index9 by -36 bps. Overall, credit performed well as investment grade spreads generally tightened throughout the trailing 12-month period. The Fund is designed to be sector neutral with security selection predominantly driven by ESG and carbon-related risk characteristics within sectors and industries. The tracking difference between the Fund’s NAV and the Underlying Index’s total return for the period was -47 bps, which is reflective of the Fund’s management fee (-12 bps), trading costs (-7 bps), sampling (-29 bps), and other factors (+1 bps).

 

 

1

The ICE BofA MOVE Index measures U.S. bond market volatility by tracking a basket of OTC options on U.S. interest rate swaps.

 

2 

A yield curve is constructed by plotting a session’s final yields for various maturities including 1-month, 3-month, 6-month, 1-year, 2-year, 3-year, 5-year, 7-year, 10-year, 20-year, and 30-year maturities.

 

3 

Credit spread is the difference in yield between one debt security and another debt security with the same maturity but of lesser quality.

 

4 

The option-adjusted spread (OAS) is the measurement of the spread of a fixed-income security rate or portfolio and typically the Treasury securities yield (often referred to as the risk-free rate) and that spread is added to the fixed-income security for comparison purposes.

 

5 

Bloomberg U.S. Credit Index measures the investment grade, US dollar-denominated, taxable corporate and government related bond markets.

6 

A unit that is equal to 1/100th of 1% and is used to denote the change in a financial instrument.

 

7 

High yield are fixed income securities that are rated in the middle rating of Moody’s, Fitch and S&P is Ba1/BB+/BB+ or below.

 

8 

The ICE BofA US High Yield Index is market capitalization weighted and is designed to measure the performance of U.S. dollar denominated below investment grade (commonly referred to as “junk”) corporate debt publicly issued in the U.S. domestic market.

 

9 

Bloomberg U.S. Corporate Bond Index measures the investment grade, taxable corporate bond market.

 

   FLEXSHARES ANNUAL REPORT     59  


Table of Contents

 

FlexShares®   MANAGEMENT’S DISCUSSION OF FUND PERFORMANCE

Ultra-Short Income Fund Ticker:  RAVI

 

 

CUMULATIVE PERFORMANCE

Through October 31, 2023

 

LOGO

 

AVERAGE ANNUAL TOTAL RETURN

For the period ended October 31, 2023

 

    1 Year     5 Year     10 Year    

Fund

Inception

10/9/2012

 
 

 

 

 

FlexShares Ultra-Short Income Fund (Based on Net Asset Value)

    5.27     1.99     1.54     1.46

FlexShares Ultra-Short Income Fund (Based on Market Price)

    5.30     1.98     1.53     1.46

Bloomberg 1-3 Month U.S. Treasury Bill Index

    4.88     1.77     1.14     1.03

 

All data as of 10/31/23. Total returns based on market price do not include brokerage commissions that may be payable on secondary market transactions. If brokerage commissions were included, these returns would be lower. Total returns based on market price and net asset value (“NAV”) assume that dividends and capital gain distributions have been reinvested in the Fund at market price and NAV, respectively. NAV is calculated by dividing the total value of all the securities in the Fund’s portfolio plus cash, interest and receivables less any liabilities by the number of Fund shares outstanding. Market price is determined by the midpoint of the bid/ask spread at 4:00 p.m. Eastern Time from the primary listing exchange. Market price returns may vary from NAV returns.

 

Performance quoted represents past performance and does not guarantee future results. The graph and table do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption or sale of Fund shares. Unlike the index that the Fund seeks to track, the Fund’s total returns are reduced by operating expenses, such as transaction costs and management fees. An investor cannot invest directly in an index.

 

Performance reflects contractual reimbursements in effect until March 1, 2024. In the absence of such reimbursements, performance would be reduced. The gross expense ratio of the Fund is 0.26% and the net expense ratio is 0.25%. The gross and net expense ratios disclosed are as reported in the Fund’s prospectus, which may differ from the gross and net expense ratios presented in the Fund’s financial reports. Current performance may be higher or lower than performance shown. Investment return and the principal value of an investment will fluctuate. Shares may be worth more or less than original cost when redeemed or sold in the market.

 

FlexShares ETFs’ performance data current to the most recent month-end is available at www.flexshares.com.

 

PORTFOLIO ANALYSIS

 

The Fund seeks maximum current income consistent with the preservation of capital and liquidity. The Fund seeks to achieve its investment objective by investing under normal circumstances at least 80% of its total assets in a portfolio of fixed-income instruments, including bonds, debt securities and other similar instruments issued by U.S. and non-U.S. public and private sector entities. Such issuers include, without limitation, U.S. and non-U.S. governments and their agencies, instrumentalities or sponsored enterprises, U.S. state and local governments and municipalities, and U.S. and non-U.S. private-sector entities, such as corporations and banks. The average effective duration1 of the Fund will vary based on The Northern Trust Company Investment Policy Committee’s forecast for interest rates and will normally not exceed one year. The dollar-weighted average portfolio maturity of the Fund is normally not expected to exceed two years.

 

In the beginning of the fiscal year ending October 31, 2023, fixed income investments moved higher coming off extremely depressed levels, as market implied odds over a soft landing versus hard landing fluctuated. The beginning of the 2023 calendar year saw fixed income assets continue to post positive results despite significant interest rate volatility. Ultimately, the 2-year and 10-year treasury yields dropped in parallel down 0.40% in Q1 of 2023, while the U.S. Federal Reserve (the “Fed”) raised the Fed Funds rate twice. Overall, the markets entered a period of extreme volatility in March of 2023, following the regional banking disruptions as well as a rescue of a Swiss Bank. The ICE

 

1 

Average effective duration provides a measure of a fund’s interest-rate sensitivity and the longer a fund’s duration, the more sensitive the fund is to shifts in interest rates. Duration also gives an indication of how a fund’s NAV will change as interest rates change. A fund with a five-year duration would be expected to lose 5% of its NAV if interest rates rose by 1 percentage point, or gain 5%, if interest rates fell by 1 percentage point. Morningstar surveys fund companies for this information.

 

60    FLEXSHARES ANNUAL REPORT  


Table of Contents

 

FlexShares®   MANAGEMENT’S DISCUSSION OF FUND PERFORMANCE

Ultra-Short Income Fund (cont.)

 

 

PORTFOLIO ANALYSIS (cont.)

 

BofA MOVE Index2, which measures bond market volatility, spiked on March 15, 2023 to a price of 198, which was a level last seen during the Great Financial Crisis. As Q1 of 2023 came to a close, fixed income investments rallied as investors sought relative safety, and systemic banking concerns were diminishing.

 

By the summer of 2023, treasury rates increased as inflation remained elevated as strength persisted in the U.S. labor market amidst the rising rate environment. During Q2 of 2023, the 2year treasury yields rose 0.87%, the 10-year treasury yields rose 0.37%, and the 30-year treasury yields rose by 0.21%. While the Fed did hike rates heading into the summer, they chose to pause in June of 2023. Inflation remained elevated into Q3 of 2023, and the labor market remained resilient. The Fed left rates unchanged at their September 2023 meeting, though market participants interpreted that decision as a hawkish pause to allow time to further evaluate the influence of the overall tightening on the U.S. economy. Treasuries sold off throughout Q3 of 2023, specifically in the middle to long end of the yield curve3 with 10-year and 30-year treasury yields rising to 4.57% and 4.70%, respectively.

 

During October of 2023, fixed income investments were under pressure as we observed a continuation in the rise of interest rates, which we believe was driven not by the changing expectations for inflation or the Fed, but instead an increase in the required term premium, or the compensation that investors require for bearing the risk that interest rates may change over the life of the bond, given economic uncertainty and interest rate volatility.

 

Credit fundamentals remained relatively stable throughout the year as the U.S. economy was resilient, and

fears of a recession seemed to subside or at least pushed out further into the future. Investment grade credit spreads4 generally tightened throughout the fiscal year with a short-lived spike wider in March of 2023. The option adjusted spread (“OAS”)5 of the Bloomberg U.S. Credit Index6 peaked at 150 basis points (“bps”)7 on March 15, 2023 amidst the extreme market volatility centered around regional bank uncertainty, then declined to a low of 104 bps at the end of July 2023. OAS then held relatively steady around these period low levels until October of 2023, which saw spreads mildly widen back out to finish the fiscal year at 119 bps. Credit spreads in the U.S. high yield8 market followed a similar path, as investment grade spreads during the fiscal year spiked up to 520 bps in March, measured by the OAS of the ICE BofA U.S. High Yield Index9. High yield spreads then tightened to a period low at the end of July 2023, and subsequently widened gently to finish the fiscal year at 448 bps.

 

For the 12 months ended October 31, 2023, the Fund outperformed the generic Treasury Bill index, as defined by the Bloomberg 1-3 Month U.S. Treasury Bill Index10, by 39 basis points (“bps”)11. During this period, 1-3 month Treasury yields rose drastically (1-month Treasury Bill yields rose by 179 bps and 3-month Bill yields rose by 141 bps). The Fund’s underweight to Treasuries, as well as its long to duration positioning, detracted slightly from performance as short-term rates rose, while the Fund’s curve positioning contributed positively to performance. The Fund’s exposure to corporate credit securities positively impacted performance versus the benchmark index.

2 

The ICE BofA MOVE Index measures U.S. bond market volatility by tracking a basket of OTC options on U.S. interest rate swaps.

 

3 

A yield curve is constructed by plotting a session’s final yields for various maturities including 1-month, 3-month, 6-month, 1-year, 2-year, 3-year, 5-year, 7-year, 10-year, 20-year, and 30year maturities.

 

4 

Credit spread is the difference in yield between one debt security and another debt security with the same maturity but of lesser quality.

 

5 

The option-adjusted spread (OAS) is the measurement of the spread of a fixed-income security rate or portfolio and typically the Treasury securities yield (often referred to as the riskfree rate) and that spread is added to the fixed-income security for comparison purposes.

 

6 

Bloomberg U.S. Credit Index measures the investment grade, US dollar-denominated, taxable corporate and government related bond markets.

7 

A unit that is equal to 1/100th of 1% and is used to denote the change in a financial instrument.

 

8 

High yield are fixed income securities that are rated in the middle rating of Moody’s, Fitch and S&P is Ba1/BB+/BB+ or below.

 

9 

The ICE BofA US High Yield Index is market capitalization weighted and is designed to measure the performance of U.S. dollar denominated below investment grade (commonly referred to as “junk”) corporate debt publicly issued in the U.S. domestic market.

 

10 

The Bloomberg 1-3 Month U.S. Treasury Bill Index is designed to measure the performance of public obligations of the U.S. Treasury that have a remaining maturity of greater than or equal to 1 month and less than 3 months.

 

11 

A unit that is equal to 1/100th of 1% and is used to denote the change in a financial instrument.

 

   FLEXSHARES ANNUAL REPORT     61  


Table of Contents

 

FlexShares®   MANAGEMENT’S DISCUSSION OF FUND PERFORMANCE

Core Select Bond Fund Ticker:   BNDC

 

 

CUMULATIVE PERFORMANCE

Through October 31, 2023

 

LOGO

 

 

AVERAGE ANNUAL TOTAL RETURN

For the period ended October 31, 2023

 

     1 Year     3 Year     5 Year     Fund
Inception
11/18/2016
 
  

 

 

 

FlexShares Core Select Bond Fund (Based on Net Asset Value)

     -0.15     -5.71     -0.08     -0.05

FlexShares Core Select Bond Fund (Based on Market Price)

     -0.15     -5.72     -0.10     -0.05

Bloomberg U.S. Aggregate Bond Index

     0.36     -5.57     -0.06     0.13

 

All data as of 10/31/23. Total returns based on market price do not include brokerage commissions that may be payable on secondary market transactions. If brokerage commissions were included, these returns would be lower. Total returns based on market price and net asset value (“NAV”) assume that dividends and capital gain distributions have been reinvested in the Fund at market price and NAV, respectively. NAV is calculated by dividing the total value of all the securities in the Fund’s portfolio plus cash, interest and receivables less any liabilities by the number of Fund shares outstanding. Market price is determined by the midpoint of the bid/ask spread at 4:00 p.m. Eastern Time from the primary listing exchange. Market price returns may vary from NAV returns.

 

Performance quoted represents past performance and does not guarantee future results. The graph and table do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption or sale of Fund shares. Unlike the index that the Fund seeks to track, the Fund’s total returns are reduced by operating expenses, such as transaction costs and management fees. An investor cannot invest directly in an index.

 

Performance reflects contractual reimbursements in effect until March 1, 2024. In the absence of such reimbursements, performance would be reduced. The gross expense ratio of the Fund is 0.56% and the net expense ratio is 0.35%. The gross and net expense ratios disclosed are as reported in the Fund’s prospectus, which may differ from the gross and net expense ratios presented in the Fund’s financial reports. Current performance may be higher or lower than performance shown. Investment return and the principal value of an investment will fluctuate. Shares may be worth more or less than original cost when redeemed or sold in the market.

 

FlexShares ETFs’ performance data current to the most recent month-end is available at www.flexshares.com.

 

PORTFOLIO ANALYSIS

 

The Fund seeks total return and preservation of capital. The Fund seeks to achieve its investment objective by investing, under normal circumstances, at least 80% of its net assets in U.S. dollar-denominated investment-grade fixed-income securities either directly or indirectly through exchange-traded funds (“ETFs”) and other registered investment companies (together with ETFs, “Underlying Funds”). The Fund primarily invests in fixed-rate securities of varying maturities, including bonds, debt securities and other similar instruments issued by U.S. public and U.S and non-U.S. private sector entities. Such issuers include, without limitation, U.S. governments and their agencies, instrumentalities or sponsored enterprises, and U.S. and non-U.S. private-sector entities, such as corporations and banks. The Fund may invest in fixed income securities of any maturity.

 

The Fund seeks to provide attractive risk-adjusted performance by investing in a portfolio of fixed-income securities and Underlying Funds. The Fund generally adjusts its allocations to securities based on Northern Trust Investment Inc.’s (“NTI”) assessment of potential changes in interest rate levels, the shape of the yield curve1 and credit spread relationships, which is the difference in yield between one debt security and another debt security with the same maturity but of lesser quality. The Fund also seeks to balance the potential for return and risk while emphasizing liquidity and diversification across a spectrum of U.S. dollar-denominated investment-grade fixed income securities.

 

In the beginning of the fiscal year ending October 31, 2023, fixed income investments moved higher coming off extremely depressed levels, as market implied odds over a soft landing versus hard landing fluctuated. The beginning of the 2023 calendar year saw fixed income assets continue to post positive

 

1 

A yield curve is constructed by plotting a session’s final yields for various maturities including 1-month, 3-month, 6-month, 1-year, 2-year, 3-year, 5-year, 7-year, 10-year, 20-year and 30year maturities.

 

62    FLEXSHARES ANNUAL REPORT  


Table of Contents

 

FlexShares®   MANAGEMENT’S DISCUSSION OF FUND PERFORMANCE

Core Select Bond Fund (cont.)

 

 

PORTFOLIO ANALYSIS (cont.)

 

results despite significant interest rate volatility. Ultimately, the 2-year and 10-year treasury yields dropped in parallel down 0.40% in Q1 of 2023, while the U.S. Federal Reserve (the “Fed”) raised the Fed Funds rate twice. Overall, the markets entered a period of extreme volatility in March of 2023, following the regional banking disruptions as well as a rescue of a Swiss Bank. The ICE BofA MOVE Index2, which measures bond market volatility, spiked on March 15, 2023 to a price of 198, which was a level last seen during the Great Financial Crisis. As Q1 of 2023 came to a close, fixed income investments rallied as investors sought relative safety, and systemic banking concerns were diminishing.

 

By the summer of 2023, treasury rates increased as inflation remained elevated as strength persisted in the U.S. labor market amidst the rising rate environment. During Q2 of 2023, the 2year treasury yields rose 0.87%, the 10-year treasury yields rose 0.37%, and the 30-year treasury yields rose by 0.21%. While the Fed did hike rates heading into the summer, they chose to pause in June of 2023. Inflation remained elevated into Q3 of 2023, and the labor market remained resilient. The Fed left rates unchanged at their September 2023 meeting, though market participants interpreted that decision as a hawkish pause to allow time to further evaluate the influence of the overall tightening on the U.S. economy. Treasuries sold off throughout Q3 of 2023, specifically in the middle to long end of the yield curve with 10-year and 30-year treasury yields rising to 4.57% and 4.70%, respectively.

 

During October of 2023, fixed income investments were under pressure as we observed a continuation in the rise of interest rates, which we believe was driven not by the changing expectations for inflation or the

Fed, but instead an increase in the required term premium, or the compensation that investors require for bearing the risk that interest rates may change over the life of the bond, given economic uncertainty and interest rate volatility.

 

Credit fundamentals remained relatively stable throughout the year as the U.S. economy was resilient, and fears of a recession seemed to subside or at least pushed out further into the future. Investment grade credit spreads3 generally tightened throughout the fiscal year with a short-lived spike wider in March of 2023. The option adjusted spread (“OAS”)4 of the Bloomberg U.S. Credit Index5 peaked at 150 basis points (“bps”)6 on March 15, 2023 amidst the extreme market volatility centered around regional bank uncertainty, then declined to a low of 104 bps at the end of July 2023. OAS then held relatively steady around these period low levels until October of 2023, which saw spreads mildly widen back out to finish the fiscal year at 119 bps. Credit spreads in the U.S. high yield7 market followed a similar path, as investment grade spreads during the fiscal year spiked up to 520 bps in March, measured by the OAS of the ICE BofA U.S. High Yield Index8. High yield spreads then tightened to a period low at the end of July 2023, and subsequently widened gently to finish the fiscal year at 448 bps.

 

During the fiscal year, the Fund was generally positioned neutral in comparison to the Bloomberg U.S. Aggregate Bond Index9 from a bond sector standpoint. The Fund did have a modest overweight to mortgage-backed securities (“MBS”) where we saw opportunity, given how cheap MBS spreads were trading relative to historical averages. While MBS spreads rallied through most of the fiscal year, they have sold off since July 2023 on the back of increased interest rate volatility,

 

2 

The ICE BofA MOVE Index measures U.S. bond market volatility by tracking a basket of OTC options on U.S. interest rate swaps.

 

3 

Credit spread is the difference in yield between one debt security and another debt security with the same maturity but of lesser quality.

 

4 

The option-adjusted spread (OAS) is the measurement of the spread of a fixed-income security rate or portfolio and typically the Treasury securities yield (often referred to as the riskfree rate) and that spread is added to the fixed-income security for comparison purposes.

 

5 

Bloomberg U.S. Credit Index measures the investment grade, US dollar-denominated, taxable corporate and government related bond markets.

6 

A unit that is equal to 1/100th of 1% and is used to denote the change in a financial instrument.

 

7 

High yield are fixed income securities that are rated in the middle rating of Moody’s, Fitch and S&P is Ba1/BB+/BB+ or below.

 

8

The ICE BofA US High Yield Index is market capitalization weighted and is designed to measure the performance of U.S. dollar denominated below investment grade (commonly referred to as “junk”) corporate debt publicly issued in the U.S. domestic market.

 

9 

Bloomberg U.S. Aggregate Bond Index is a broad based benchmark that measures the investment grade, US dollar denominated, taxable bond market that includes treasuries, government related and corporate securities, mortgage backed securities, asset backed securities and collateralized mortgage backed securities.

 

   FLEXSHARES ANNUAL REPORT     63  


Table of Contents

 

FlexShares®   MANAGEMENT’S DISCUSSION OF FUND PERFORMANCE

Core Select Bond Fund (cont.)

 

 

 

 

 

 

PORTFOLIO ANALYSIS (cont.)

 

which was followed by MBS spread widening. Overall, the allocation to MBS was a modest positive contributor to Fund performance, which was offset by selection effects. Toward the end of the fiscal year, we changed the Fund’s duration positioning, moving from neutral on duration and yield curve positioning to a modest overweight position at the portfolio level. Treasury yields have risen significantly over the last several weeks of the fiscal year with the bulk of the move driven by wider term premiums. Our view is that the current level of term premium, or the added compensation we believe investors expect for the unknowns associated with holding longer-term debt, we see (in 10 year rates) is not justified by relevant macroeconomic factors such as long term growth and inflation expectations. We believe that the term premium could compress closer to our expectations of fair value. Over the fiscal year, the Fund underperformed the broader bond index, as defined by the Bloomberg U.S. Aggregate Bond Index, by -51 basis points.

 

64    FLEXSHARES ANNUAL REPORT  


Table of Contents

 

FlexShares® Trust

Statements of Assets and Liabilities October 31, 2023

 

 

     FlexShares®
US Quality
Low Volatility
Index Fund
    

FlexShares®
Developed Markets ex-  US

Quality Low Volatility

Index Fund

   

FlexShares®

Emerging Markets

Quality Low Volatility

Index Fund

   

FlexShares®
Morningstar US

Market Factor Tilt
Index Fund

 

ASSETS

 

Securities, at cost

   $ 173,345,381      $ 65,665,911     $ 13,811,847     $ 853,779,239  

Affiliate securities, at cost

                        511,950  

Securities Lending Reinvestments, at cost

     2,683,994                    167,140,618  
  

 

 

 

Securities, at value†

     184,796,795        64,658,984       12,867,943       1,323,299,186  

Affiliate securities, at value

                        459,393  

Securities Lending Reinvestments, at value

     2,683,994                    167,151,673  

Cash

            601,264       90,240       10,768,083  

Cash segregated at broker*

     283        163,088       20,694       1,779,829  

Foreign cash††

            457,840       34,302        

Unrealized appreciation on forward foreign currency contracts

            27,699              

Receivables:

                         

Dividends and interest

     149,206        477,672       10,022       889,549  

Securities lending income

     1,261        635             52,209  

Capital shares issued

                         

Investment adviser

     729        286       119       5,223  

Securities sold

     113,852                    411  

Variation margin on futures contracts

     1,976                     
  

 

 

 

Total Assets

     187,748,096        66,387,468       13,023,320       1,504,405,556  
  

 

 

 

LIABILITIES

 

Cash overdraft

     13,058                     

Unrealized depreciation on forward foreign currency contracts

            18,644              

Payables:

         

Cash collateral received from securities loaned

     2,683,994                    167,151,893  

Deferred compensation (Note 7)

     8,045        4,295       729       169,566  

Investment advisory fees (Note 4)

     35,020        18,329       4,464       290,517  

Trustee fees (Note 7)

     1,259        613       125       10,807  

Securities purchased

                         

Deferred non-US capital gains taxes

                  20,095        

Due to Authorized Participant

                        411  

Variation margin on futures contracts

            82,236       14,061       763,593  

Capital shares redeemed

                         

Other

     2,100              4,000       7,708  
  

 

 

 

Total Liabilities

     2,743,476        124,117       43,474       168,394,495  
  

 

 

 

Net Assets

   $ 185,004,620      $ 66,263,351     $ 12,979,846     $ 1,336,011,061  
  

 

 

 

NET ASSETS CONSIST OF:

 

Paid-in capital

   $ 184,240,592      $ 72,298,348     $ 15,413,162     $ 910,599,852  

Distributable earnings (loss)

     764,028        (6,034,997     (2,433,316     425,411,209  
  

 

 

 

Net Assets

   $ 185,004,620      $ 66,263,351     $ 12,979,846     $ 1,336,011,061  
  

 

 

 

Shares Outstanding (unlimited number of shares authorized $ 0.0001 par value)

     3,600,001        2,800,001       600,001       8,500,001  

Net Asset Value

   $ 51.39      $ 23.67     $ 21.63     $ 157.18  

† Securities on loan, at value

   $ 13,821,520      $ 2,212,131     $     $ 206,017,475  

†† Cost of foreign cash

   $      $ 463,825     $ 33,435     $  

 

*

Includes cash pledged by the Fund to cover margin requirements for open futures contracts as of 10/31/23.

 

See Accompanying Notes to the Financial Statements.

 

   FLEXSHARES ANNUAL REPORT     65  


Table of Contents

 

 

Statements of Assets and Liabilities (cont.)

 

 

    

FlexShares®

Morningstar Developed

Markets ex-US Factor

Tilt Index Fund

   

FlexShares®
Morningstar Emerging
Markets Factor Tilt

Index Fund

    FlexShares®
US Quality
Large Cap
Index Fund
   

FlexShares®
STOXX® US

ESG Select

Index Fund

 

ASSETS

 

Securities, at cost

   $ 439,193,329     $ 212,305,889     $ 138,888,823     $ 153,363,355  

Affiliate securities, at cost

                       94,332  

Securities Lending Reinvestments, at cost

     8,760,452       677,315             97,159  
  

 

 

 

Securities, at value†

     462,046,494       218,908,022       145,727,979       164,852,322  

Affiliate securities, at value

                       77,115  

Securities Lending Reinvestments, at value

     8,760,452       677,315             97,159  

Cash

     1,014,072       204,890       927,601       1,747,305  

Cash segregated at broker*

     845,221       120,659       153,608       305,740  

Foreign cash††

     2,442,412       481,779              

Unrealized appreciation on forward foreign currency contracts

     14,407       6,171              

Receivables:

                        

Dividends and interest

     3,421,440       315,948       107,697       119,805  

Securities lending income

     23,942       8,626       442       486  

Capital shares issued

                        

Investment adviser

     5,571       25,931             641  

Securities sold

     84,733                    

Variation margin on futures contracts

                        
  

 

 

 

Total Assets

     478,658,744       220,749,341       146,917,327       167,200,573  
  

 

 

 

LIABILITIES

 

Cash overdraft

                        

Unrealized depreciation on forward foreign currency contracts

     44,298       333              

Payables:

        

Cash collateral received from securities loaned

     8,760,452       677,315             97,159  

Deferred compensation (Note 7)

     94,455       46,877       7,498       9,310  

Investment advisory fees (Note 4)

     158,640       113,389       31,354       46,246  

Trustee fees (Note 7)

     4,045       1,788       2,377       1,281  

Securities purchased

                        

Deferred non-US capital gains taxes

           1,078,422              

Due to Authorized Participant

                        

Variation margin on futures contracts

     331,029       57,692       67,206       121,129  

Capital shares redeemed

                        

Other

     27,000       50,000       3,000       700  
  

 

 

 

Total Liabilities

     9,419,919       2,025,816       111,435       275,825  
  

 

 

 

Net Assets

   $ 469,238,825     $ 218,723,525     $ 146,805,892     $ 166,924,748  
  

 

 

 

NET ASSETS CONSIST OF:

 

Paid-in capital

   $ 573,435,084     $ 291,920,670     $ 147,359,786     $ 162,616,808  

Distributable earnings (loss)

     (104,196,259     (73,197,145     (553,894     4,307,940  
  

 

 

 

Net Assets

   $ 469,238,825     $ 218,723,525     $ 146,805,892     $ 166,924,748  
  

 

 

 

Shares Outstanding (unlimited number of shares authorized $ 0.0001 par value)

     7,800,001       4,700,001       3,150,001       1,625,001  

Net Asset Value

   $ 60.16     $ 46.54     $ 46.61     $ 102.72  

† Securities on loan, at value

   $ 53,104,871     $ 5,168,593     $ 4,023,270     $ 4,105,867  

†† Cost of foreign cash

   $ 2,454,649     $ 432,693     $     $  

 

*

Includes cash pledged by the Fund to cover margin requirements for open futures contracts as of 10/31/23.

 

 

See Accompanying Notes to the Financial Statements.

 

66    FLEXSHARES ANNUAL REPORT  


Table of Contents

 

 

Statements of Assets and Liabilities (cont.)

 

 

    

FlexShares®

STOXX®

Global ESG
Select

Index Fund

    

FlexShares®
ESG & Climate US
Large Cap Core

Index Fund

    FlexShares®
ESG & Climate
Developed
Markets ex-US Core
Index  Fund
    FlexShares®
ESG & Climate
Emerging
Markets Core
Index Fund
 

ASSETS

 

Securities, at cost

   $ 125,624,190      $ 36,531,669     $ 38,644,229     $ 4,738,015  

Affiliate securities, at cost

                         

Securities Lending Reinvestments, at cost

     857,504                     
  

 

 

 

Securities, at value†

     150,048,123        36,613,279       36,835,813       4,152,508  

Affiliate securities, at value

                         

Securities Lending Reinvestments, at value

     857,504                     

Cash

     1,149,258        252,917       199,496       9,025  

Cash segregated at broker*

     205,971        20,080       69,280       6,742  

Foreign cash††

     169,454              260,687       30,703  

Unrealized appreciation on forward foreign currency contracts

     7,756              6,492       3  

Receivables:

                         

Dividends and interest

     402,478        30,508       147,985       5,319  

Securities lending income

     1,000                     

Capital shares issued

                         

Investment adviser

            169       208       18  

Securities sold

                         

Variation margin on futures contracts

                         
  

 

 

 

Total Assets

     152,841,544        36,916,953       37,519,961       4,204,318  
  

 

 

 

LIABILITIES

 

Cash overdraft

                         

Unrealized depreciation on forward foreign currency contracts

                  3,294        

Payables:

         

Cash collateral received from securities loaned

     857,504                     

Deferred compensation (Note 7)

     10,464        410       422       81  

Investment advisory fees (Note 4)

     54,993        2,797       3,890       656  

Trustee fees (Note 7)

     7,085        162       193       34  

Securities purchased

                         

Deferred non-US capital gains taxes

                         

Due to Authorized Participant

                         

Variation margin on futures contracts

     95,878        17,698       23,456       3,510  

Capital shares redeemed

                         

Other

                  4,500        
  

 

 

 

Total Liabilities

     1,025,924        21,067       35,755       4,281