Table of Contents

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FlexShares® Trust

 

Annual Report

October 31, 2021

 

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Table of Contents

 

 

 
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Table of Contents

 

Letter to Shareholders

     2  

Management’s Discussion of Fund Performance

     4  

FlexShares® US Quality Low Volatility Index Fund

     4  

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

     6  

FlexShares® Emerging Markets Quality Low Volatility Index Fund

     8  

FlexShares® Morningstar US Market Factor Tilt Index Fund

     10  

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

     12  

FlexShares® Morningstar Emerging Markets Factor Tilt Index Fund

     14  

FlexShares® US Quality Large Cap Index Fund

     16  

FlexShares® STOXX® US ESG Select Index Fund (formerly known as FlexShares® STOXX® US ESG Impact Index Fund)

     18  

FlexShares® STOXX® Global ESG Select Index Fund (formerly known as FlexShares® STOXX® Global ESG Impact Index Fund)

     20  

FlexShares® ESG & Climate US Large Cap Core Index Fund

  

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

  

FlexShares® Morningstar Global Upstream Natural Resources Index Fund

     22  

FlexShares® STOXX® Global Broad Infrastructure Index Fund

     24  

FlexShares® Global Quality Real Estate Index Fund

     26  

FlexShares® Real Assets Allocation Index Fund

     28  

FlexShares® Quality Dividend Index Fund

     30  

FlexShares® Quality Dividend Defensive Index Fund

     32  

FlexShares® Quality Dividend Dynamic Index Fund

     34  

FlexShares® International Quality Dividend Index Fund

     36  

FlexShares® International Quality Dividend Defensive Index Fund

     38  

FlexShares® International Quality Dividend Dynamic Index Fund

     40  

FlexShares® iBoxx 3-Year Target Duration TIPS Index Fund

     42  

FlexShares® iBoxx 5-Year Target Duration TIPS Index Fund

     44  

FlexShares® Disciplined Duration MBS Index Fund

     46  

FlexShares® Credit-Scored US Corporate Bond Index Fund

     48  

FlexShares® Credit-Scored US Long Corporate Bond Index Fund

     50  

FlexShares® High Yield Value-Scored Bond Index Fund

     52  

FlexShares® ESG & Climate High Yield Corporate Core Index Fund

  

FlexShares® ESG & Climate Investment Grade Corporate Core Index Fund

  

FlexShares® Ready Access Variable Income Fund

     54  

FlexShares® Core Select Bond Fund

     56  

Statements of Assets and Liabilities

     59  

Statements of Operations

     67  

Statements of Changes in Net Assets

     75  

Financial Highlights

     91  

Schedules of Investments

     123  

FlexShares® US Quality Low Volatility Index Fund

     123  

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

     127  

FlexShares® Emerging Markets Quality Low Volatility Index Fund

     134  

FlexShares® Morningstar US Market Factor Tilt Index Fund

     140  

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

     178  

FlexShares® Morningstar Emerging Markets Factor Tilt Index Fund

     219  

FlexShares® US Quality Large Cap Index Fund

     269  

FlexShares® STOXX® US ESG Select Index Fund (formerly known as FlexShares® STOXX® US ESG Impact Index Fund)

     274  

FlexShares® STOXX® Global ESG Select Index Fund (formerly known as FlexShares® STOXX® Global ESG Impact Index Fund)

     280  

FlexShares® ESG & Climate US Large Cap Core Index Fund

     295  

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

     300  

FlexShares® Morningstar Global Upstream Natural Resources Index Fund

     308  

FlexShares® STOXX® Global Broad Infrastructure Index Fund

     315  

FlexShares® Global Quality Real Estate Index Fund

     321  

FlexShares® Real Assets Allocation Index Fund

     326  

FlexShares® Quality Dividend Index Fund

     327  

FlexShares® Quality Dividend Defensive Index Fund

     332  

FlexShares® Quality Dividend Dynamic Index Fund

     337  

FlexShares® International Quality Dividend Index Fund

     341  

FlexShares® International Quality Dividend Defensive Index Fund

     350  

FlexShares® International Quality Dividend Dynamic Index Fund

     357  

FlexShares® iBoxx 3-Year Target Duration TIPS Index Fund

     364  

FlexShares® iBoxx 5-Year Target Duration TIPS Index Fund

     366  

FlexShares® Disciplined Duration MBS Index Fund

     368  

FlexShares® Credit-Scored US Corporate Bond Index Fund

     372  

FlexShares® Credit-Scored US Long Corporate Bond Index Fund

     390  

FlexShares® High Yield Value-Scored Bond Index Fund

     400  

FlexShares® ESG & Climate High Yield Corporate Core Index Fund

     421  

FlexShares® ESG & Climate Investment Grade Corporate Core Index Fund

     435  

FlexShares® Ready Access Variable Income Fund

     443  

FlexShares® Core Select Bond Fund

     453  

Notes to the Financial Statements

     455  

Report of Independent Registered Public Accounting Firm

     508  

Tax Information

     510  

Fund Expenses

     512  

Trustees and Officers

     516  

Approval of Advisory Agreement

     520  

Supplemental Information

     533  

For More Information

     547  

 

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Table of Contents

 

 

Letter to Shareholders

 

 

Dear Shareholder,

 

We are delighted to provide this update for the FlexShares exchange traded funds, sponsored and managed by Northern Trust Asset Management (NTAM)1, for the year ended October 31, 2021.

 

While COVID-19 continued to influence many aspects of our lives, the focus notably shifted in 2021 to the prospect of moving forward. This was certainly the case for the global economy. We believe that the anticipation of a sustainable turnaround coupled with healthy corporate balance sheets fueled investor confidence, while pent-up demand, the re-opening of businesses and fiscal stimulus boosted consumer spending. Both trends supported positive economic results and prospects across markets, sectors and industries.

 

Such robust activity, after a virtual shutdown of the global economy, presented unanticipated challenges to business models, manufacturing capacities, logistics and supply chains. That, in turn, has contributed to accelerated price increases for many goods and services. As a result, investors may find themselves grappling with questions about the nature and longevity of these inflationary pressures, how they are being addressed, and how to frame an appropriate response.

 

This annual report includes financial results for each of the FlexShares ETFs in this environment, and commentary and outlooks from NTAM. We trust this information will provide useful clarity and perspective.

 

I also want to share three recent FlexShares milestones:

 

¨   Efficient access to responsible investing: The FlexShares Core ESG2 and Climate suite introduced a new era for us – strategies that seek to address sustainability and climate issues within a core equity or fixed-income
   

portfolio. Please visit www.flexshares.com to explore the features and potential benefits of these new ETFs within the context of your portfolio.

¨   Expanded reach: With the launch of our ESG-focused ETFs covering developed markets, FlexShares is giving European investors their first opportunity to experience our investor-first approach. We look forward to expanding our product lineup in the region in the months ahead.
¨   10 years, and we’re just getting started: FlexShares began with a promise to seek to deliver efficient investment vehicles to grow capital, generate income, manage portfolio risks and meet liquidity needs. We look back with pride at what we have accomplished in service to that promise and to our clients. We look forward with a renewed sense of purpose and deep gratitude for your continued confidence.

 

On behalf of all our partners and colleagues at NTAM and FlexShares, best wishes for health, well-being and prosperity to you and yours.

 

Sincerely,

 

Darek Wojnar, CFA

Head, Funds & Managed Account Solutions, Northern Trust Asset Management

 

The views in this letter were as of October 31, 2021 and may not necessarily reflect the same views on the date this letter is first published or any time thereafter. These views are intended to help shareholders in understanding the Funds’ investment methodology and do not constitute investment advice.

 

This report is submitted for the general information of the shareholders of the Funds. It is not authorized for distribution to prospective investors unless preceded or accompanied by an effective prospectus, which includes information regarding the Funds’ risks, objectives, fees and expenses, experience of its management, and other information.

 

An investment in the Funds’ is subject to numerous risks, including possible loss of principal. Fund returns may not match the return of the respective indexes.

 

 

1 

Northern Trust Asset Management is the branding name of the asset management business of Northern Trust Corporation, a financial holding company and publicly traded company.

2 

ESG investing commonly means utilizing environmental, social, and governance (ESG) criteria as a set of standards for a company’s operations that socially conscious investors use to screen potential investments.

 

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Table of Contents

 

 

Letter to Shareholders (cont.)

 

 

Some of the risks include, but are not limited to, the following: asset class; commodity; concentration; counterparty; currency; derivatives; dividend; emerging markets; equity securities; fluctuation of yield; foreign securities; geographic; income; industry concentration; inflation-protected securities; infrastructure-related companies; interest rate/ maturity risk; issuer; large cap; management; market; market trading; mid cap stock; MLP; momentum; natural resources; new funds; non-diversification; passive investment; privatization; small cap stock; tracking error; value investing; and volatility risk. A full description of risks is in each Fund’s prospectus.

 

Foreside Fund Services, LLC, distributor.

 

   FLEXSHARES ANNUAL REPORT     3  


Table of Contents

 

FlexShares®   MANAGEMENT’S DISCUSSION OF FUND PERFORMANCE

US Quality Low Volatility Index Fund Ticker:  QLV

 

 

CUMULATIVE PERFORMANCE

Through October 31, 2021

 

LOGO

 

AVERAGE ANNUAL TOTAL RETURN

For the period ended October 31, 2021

 

    1 Year     Fund
Inception
7/15/2019
 
 

 

 

 

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

    35.05     15.93

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

    34.99     15.96

Northern Trust Quality Low Volatility Index

    35.36     16.24

Russell 1000® Index

    43.51     22.94

 

All data as of 10/31/21. 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, 2022. 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 absolute volatility characteristics relative to the Northern Trust 1250 Index (“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 protecting against downside risks during certain market environments. As of October 31, 2021, there were 109 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 ended October 31, 2021, prices on U.S. investments generally traded higher. Through Q4 of 2020, U.S. investments rose as news about the COVID-19 (“COVID”) vaccine advancements were viewed by investors as a catalyst for a potential economic recovery. The passage of the federal fiscal stimulus package (Consolidated Appropriations Act, 2021) in December along with the U.S. Federal Reserve Bank’s actions to keep interest rates low while continuing quantitative easing measures also supported U.S. investments. Despite a volatile start in January 2021, U.S. domestic investments rose in Q1 of 2021 as several sectors that had previously struggled during the pandemic including energy, financials and industrials helped to lead investments higher. Domestic U.S. investments continued to advance in Q2 of 2021 as

 

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Table of Contents

 

FlexShares®   MANAGEMENT’S DISCUSSION OF FUND PERFORMANCE

US Quality Low Volatility Index Fund (cont.)

 

 

PORTFOLIO ANALYSIS (cont.)

 

strong consumption growth and industrial production drove those investments higher. The May 2021 report of inflation, as measured by the Consumer Price Index (CPI)1, recorded the largest increase since June 1992, but at the time many investors viewed this as a transitory spike caused by increasing global economic recovery and supply chain disruptions. In Q3 of 2021, U.S. investments remained relatively flat despite strong corporate earnings as investors may have been concerned that future growth would not materialize, and that inflation may be more persistent than previously expected. Domestic U.S. investments advanced in October 2021 due to strong 3rd quarter earnings and robust consumer confidence.

 

Because U.S. domestic investments trended upwards during the 12 months ended October 31, 2021, we believe the low volatility factor2 approach was a negative driver of Fund performance for the twelve-month period. In addition, we believe that investors once again showed a preference for low quality factor3 companies, resulting in the high-quality factor exposure detracting from Fund performance over the 12 months. Overall, the negative performance derived from the low volatility and quality factor exposures were the primary sources of the Underlying Index’s underperformance against the Russell 1000®4 Index by -8.15%. Tracking difference between the Fund’s NAV and the Underlying Index’s total return for the 12-month period was -31 basis points (“bps”)5, which is reflective of the management fee (-22 bps), stock selection/futures (+3 bps), and the compounding effect of tracking error over time (-12 bps).

 

 

1 

The Consumer Price Index (CPI) is a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services. Indexes are available for the U.S. and various geographic areas.

 

2 

The low volatility factor is based on the measurement of a group of stocks that have been less volatile in their asset class over a defined time frame.

 

3 

The quality factor is based on a belief that there are a set of clearly defined fundamental criteria that seek to identify companies with outstanding financial characteristics.

 

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.

 

   FLEXSHARES ANNUAL REPORT     5  


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, 2021

 

LOGO

 

AVERAGE ANNUAL TOTAL RETURN

For the period ended October 31, 2021

 

     1 Year     Fund
Inception
7/15/2019
 
  

 

 

 

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

     22.05     7.32

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

     21.88     7.47

Northern Trust Developed Markets ex-US Quality Low Volatility Index

     22.17     7.55

MSCI World ex-US Index

     35.59     11.72

 

All data as of 10/31/21. 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, 2022. 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 Index SM (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 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 protecting against downside risks during certain market environments. As of October 31, 2021, there were 190 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 ended October 31, 2021, prices on Developed international investments generally traded higher. Over the course of the 12-month period, while the U.S. dollar (USD) started off volatile, it ultimately ended flat against other Developed international currencies and generally for U.S. investors did not impact positively or negatively. Through Q4 of 2020, Developed international investments moved higher as news about the COVID-19 (“COVID”) vaccine advancements were viewed by investors as a catalyst for a potential economic recovery. Developed international investments

 

6    FLEXSHARES ANNUAL REPORT  


Table of Contents

 

FlexShares® Developed   MANAGEMENT’S DISCUSSION OF FUND PERFORMANCE

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

 

 

PORTFOLIO ANALYSIS (cont.)

 

may have been helped by a Brexit trade agreement between the United Kingdom and the European Union as investor uncertainty around intraregional commerce was alleviated. Developed international investments continued to rise over the 1st half of 2021 due to strong corporate earnings and positive economic data. Sectors that had previously struggled during the pandemic, including energy and financials, helped to lead investments higher. Developed international investments moved modestly lower in Q3 of 2021 due to inflation concerns stemming from supply chain bottlenecks and rising energy prices. Developed international investments rebounded in October 2021 as lockdown policies enacted at the height of the pandemic were eased in many countries and latent consumer demand led to strong corporate earnings.

 

Because Developed international investments trended upwards during the 12 months ended October 31, 2021, we believe the low volatility factor1 approach was a negative driver of Fund performance for the twelve-month period. Additionally, we believe that investors showed a preference for low quality companies within the Developed international universe. Consequently, the quality factor2 focus of the Fund’s Underlying Index was also a negative driver of Fund performance for the 12-month period. Overall, the negative performance derived from both the low volatility and quality factor exposures were the primary sources of the Underlying Index’s underperformance against the MSCI World ex-US Index3 by -13.42%. The tracking difference between the Fund’s NAV and the Underlying Index’s total return for the 12-month period was -12 basis points (“bps”)4, which is reflective of the

Fund’s management fee (-32 bps), stock selection/futures (+20 bps), securities lending (+1 bps), dividend tax differential (+2 bps), and the compounding effect of tracking error over time (-3 bps).

 

1 

The low volatility factor is based on the measurement of a group of stocks that have been less volatile in their asset class over a defined time frame.

 

2 

The quality factor is based on a belief that there are a set of clearly defined fundamental criteria that seek to identify companies with outstanding financial characteristics.

 

3 

The Morgan Stanley Capital International World Index Ex-U.S. is a market-capitalization-weighted index maintained by Morgan Stanley Capital International (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.

 

   FLEXSHARES ANNUAL REPORT     7  


Table of Contents

 

FlexShares® Emerging   MANAGEMENT’S DISCUSSION OF FUND PERFORMANCE

Markets Quality Low Volatility Index Fund Ticker:  QLVE

 

 

CUMULATIVE PERFORMANCE

Through October 31, 2021

 

LOGO

 

AVERAGE ANNUAL TOTAL RETURN

For the period ended October 31, 2021

 

     1 Year     Fund
Inception
7/15/2019
 
  

 

 

 

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

     12.09     4.54

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

     11.62     4.78

Northern Trust Emerging Markets Quality Low Volatility Index

     13.47     5.37

MSCI Emerging Markets Index

     16.96     10.45

 

All data as of 10/31/21. 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, 2022. 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 protecting against downside risks during certain market environments. As of October 31, 2021, there were 151 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 ended October 31, 2021, prices on Emerging market investments generally traded higher. Over the course of the 12-month period, while the U.S. dollar (USD) started off volatile, it ultimately weakened against Emerging market currencies and positively impacted U.S. investors as returns in local currencies generally were enhanced by the falling of the USD. Through Q4 of 2020, Emerging market investments moved higher as overall commodity prices rose, USD weakness and news about the COVID-19 (“COVID”) vaccine advancements were viewed by investors as a catalyst for a potential economic recovery. Chinese investments,

 

8    FLEXSHARES ANNUAL REPORT  


Table of Contents

 

FlexShares® Emerging   MANAGEMENT’S DISCUSSION OF FUND PERFORMANCE

Markets Quality Low Volatility Index Fund (cont.)

 

 

PORTFOLIO ANALYSIS (cont.)

 

however, fell due to increased trading tensions between the U.S. and China as well as the Chinese government’s continued investigations which were viewed by some investors as anti-business. Emerging market investments moved higher in Q1 of 2021 but trailed Developed market investments as COVID vaccine rollout rates trailed Developed nations and some countries were forced to reestablish restrictions due to COVID outbreaks. Emerging market investments rose in Q2 of 2021 as continued investor optimism overcame an early quarter selloff driven by concerns of rising inflation and U.S. monetary policy tightening. Emerging market investments sold off in Q3 of 2021 as investor concerns surrounding economic growth in China were driven by the collapse of a large real estate investment company and a subsequent increase in regulatory pressures on some of China’s top performing technology and financial companies. Emerging market investments moved modestly higher in October 2021, however, but trailed Developed market investments as region specific investments, such as in Latin America, struggled.

 

Investors showed a preference for low quality companies in emerging markets for the twelve months ending October 31, 2021, resulting in the high-quality factor1 exposure being a negative driver of Fund performance. The sharp decline in emerging market equities in Q3 of 2021 resulted in low volatility stocks outperforming high volatility stocks over the twelve-month period. As a result, the low volatility factor2 exposure was a positive driver of Fund performance for the fiscal year. Overall, the positive performance derived from the low volatility factor was not enough to offset the negative performance of the quality factor, leading to the Underlying Index’s underperformance against the MSCI Emerging Markets Index3 by -3.49%. Tracking difference between the Fund’s NAV and the Underlying Index’s total return for the 12-month period was -1.38%, which is reflective of the Fund’s management fee of -40 basis points (“bps”)4, which is reflective of

the Fund’s management fee (-40 bps), stock selection/futures (+9 bps), and dividend tax differential (+10 bps).

 

1 

The quality factor is based on a belief that there are a set of clearly defined fundamental criteria that seek to identify companies with outstanding financial characteristics.

 

2 

The low volatility factor is based on the measurement of a group of stocks that have been less volatile in their asset class over a defined time frame.

 

3 

The Morgan Stanley Capital International 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.

 

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Table of Contents

 

FlexShares® Morningstar®   MANAGEMENT’S DISCUSSION OF FUND PERFORMANCE

US Market Factor Tilt Index Fund Ticker:  TILT

 

 

CUMULATIVE PERFORMANCE

Through October 31, 2021

 

LOGO

 

AVERAGE ANNUAL TOTAL RETURN

For the period ended October 31, 2021

 

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

 

 

 

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

    49.68     17.10     14.93     15.12

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

    49.57     17.08     14.92     15.12

Morningstar® U.S. Market Factor Tilt IndexSM

    50.18     17.24     15.11     15.30

 

All data as of 10/31/21. 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, 2022. 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 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 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. As of October 31, 2021, there were 2,733 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 ended October 31, 2021, prices on U.S. investments generally traded higher. Through Q4 of 2020, U.S. investments rose as news about the COVID-19 (“COVID”) vaccine advancements were viewed by investors as a catalyst for a potential economic recovery. The passage of the federal fiscal stimulus package (Consolidated Appropriations Act, 2021) in December 2020 along with the U.S. Federal Reserve Bank’s actions to keep interest rates low while continuing quantitative easing measures also supported U.S. investments. Despite a volatile start in January 2021, U.S. domestic investments rose in Q1 of 2021 as several sectors that had previously struggled during the pandemic including energy, financials and industrials helped to lead investments higher. Domestic U.S. investments continued to advance in Q2 of 2021 as strong consumption growth and industrial

 

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FlexShares® Morningstar®   MANAGEMENT’S DISCUSSION OF FUND PERFORMANCE

US Market Factor Tilt Index Fund (cont.)

 

 

PORTFOLIO ANALYSIS (cont.)

 

production drove those investments higher. The May 2021 report of inflation, as measured by the Consumer Price Index (CPI), recorded the largest increase since June 1992, but at the time many investors viewed this as a transitory spike caused by increasing global economic recovery and supply chain disruptions. In Q3 of 2021, U.S. investments remained relatively flat despite strong corporate earnings as investors may have been concerned that future growth would not materialize, and that inflation may be more persistent than previously expected. Domestic U.S. investments advanced in October 2021 due to strong 3rd quarter earnings and robust consumer confidence, but at the time many investors viewed this as a transitory spike caused by increasing global economic recovery and supply chain disruptions.

 

Because U.S. domestic investments trended upwards during the 12 months ended October 31, 2021, we believe the value factor1 was a positive driver of Fund performance during the fiscal year ended October 31, 2021 as value stocks outperformed growth stocks2. In addition, the size factor3 was a positive driver of Fund performance over the twelve months as small cap stocks outperformed large cap stocks. Overall, the positive performance derived from the value and size factor exposures was the primary source of the Underlying Index’s outperformance against the Russell 3000®4 Index by 6.28%. Tracking difference between the Fund’s NAV and the Underlying Index’s total return for the 12-month period was -50 basis points (“bps”)5,

which is reflective of the management fee (-25 bps), stock selection/futures (-9 bps), securities lending (+3 bps), and compounding of tracking error over time (-19 bps).

1 

The value factor is based on a belief that stocks that are inexpensive relative to some measure of fundamental value outperform those that are pricier.

 

2 

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

 

3 

The size factor 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. Large cap generally means stocks with a total capitalization of more than $10 billion. Mid cap is between $2 billion and $10 billion. Small cap is less than $2 billion in total capitalization.

 

4 

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

 

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

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

 

 

CUMULATIVE PERFORMANCE

Through October 31, 2021

 

LOGO

 

AVERAGE ANNUAL TOTAL RETURN

For the period ended October 31, 2021

 

    1 Year     3 Year     5 Year     Fund
Inception
9/25/2012
 
 

 

 

 

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

    38.79     10.31     8.85     7.07

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

    38.95     10.50     8.90     7.09

Morningstar® Developed Markets ex-US Factor Tilt IndexSM

    38.92     10.33     8.89     7.17

 

All data as of 10/31/21. 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, 2022. 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. As of October 31, 2021, there were 3,403 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 ended October 31, 2021, prices on Developed international investments generally traded higher. Over the course of the 12-month period, while the U.S. dollar (USD) started off volatile, it ultimately ended flat against other Developed international currencies and generally for U.S. investors did not impact positively or negatively. Through Q4 of 2020, Developed international investments moved higher as news about the COVID-19 (“COVID”) vaccine advancements were viewed by investors as a catalyst for a potential economic recovery. Developed international investments may have been helped by a Brexit trade agreement between the United Kingdom and the European Union as investor uncertainty around intraregional commerce was alleviated. Developed international investments

 

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FlexShares® Morningstar®   MANAGEMENT’S DISCUSSION OF FUND PERFORMANCE

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

 

 

PORTFOLIO ANALYSIS (cont.)

 

continued to rise over the 1st half of 2021 due to strong corporate earnings and positive economic data. Sectors that had previously struggled during the pandemic, including energy and financials, helped to lead investments higher. Developed international investments moved modestly lower in Q3 of 2021 due to inflation concerns stemming from supply chain bottlenecks and rising energy prices. Developed international investments rebounded in October of 2021 as lockdown policies enacted at the height of the pandemic were eased in many countries and latent consumer demand led to strong corporate earnings.

 

Because Developed international investments trended upwards during the 12 months ended October 31, 2021, we believe the value factor1 was a positive driver of Fund performance during the fiscal year ended October 31, 2021 as value stocks outperformed growth stocks2. The size factor3, however, was a negative driver of Fund performance over the twelve months as small cap stocks underperformed large cap stocks. Overall, the positive performance derived from the value factor exposures offset the negative performance of the size factor, leading to the Underlying Index’s outperformance against the MSCI World ex-USA IMI Index4 by 3.08%. Tracking difference between the Fund’s NAV and the Underlying Index’s total return for the 12-month period was -13 basis points (“bps”)5,

which is reflective of the Fund’s management fee (-39 bps), stock selection/futures (+1 bps), securities lending (+9 bps), dividend tax differential (+21 bps), and compounding of tracking error over time (-5 bps).

1 

The value factor is based on a belief that stocks that are inexpensive relative to some measure of fundamental value outperform those that are pricier.

 

2 

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

 

3 

The size factor 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. Large cap generally means stocks with a total capitalization of more than $10 billion. Mid cap is between $2 billion and $10 billion. Small cap is less than $2 billion in total capitalization.

 

4 

The Morgan Stanley Capital International 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, 2021

 

LOGO

 

AVERAGE ANNUAL TOTAL RETURN

For the period ended October 31, 2021

 

    1 Year     3 Year     5 Year     Fund
Inception
9/25/2012
 
 

 

 

 

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

    28.95     11.08     7.79     4.38

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

    30.12     11.50     7.73     4.41

Morningstar® Emerging Markets Factor Tilt IndexSM

    30.40     11.98     8.58     5.13

 

All data as of 10/31/21. 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, 2022. 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 Index SM (the “Underlying Index”). The Underlying Index is designed to reflect the performance of a selection of companies that, in 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. As of October 31, 2021, there were 3,183 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 ended October 31, 2021, prices on Emerging market investments generally traded higher. Over the course of the 12-month period, while the U.S. dollar (USD) started off volatile, it ultimately weakened against Emerging market currencies and positively impacted U.S. investors as returns in local currencies generally were enhanced by the falling of the USD. Through Q4 of 2020, Emerging market investments moved higher as overall commodity prices rose; USD weakness and news about the COVID-19 (“COVID”) vaccine advancements were viewed by investors as a catalyst for a potential economic recovery. Chinese investments, however, fell due to increased trading tensions between the U.S. and China as well as the Chinese government’s continued investigations which were viewed by some investors as anti-business. Emerging market

 

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FlexShares® Morningstar®   MANAGEMENT’S DISCUSSION OF FUND PERFORMANCE

Emerging Markets Factor Tilt Index Fund (cont.)

 

 

PORTFOLIO ANALYSIS (cont.)

 

investments moved higher in Q1 of 2021 but trailed Developed market investments as COVID vaccine rollout rates trailed Developed nations and some countries were forced to reestablish restrictions due to COVID outbreaks. Emerging market investments rose in Q2 of 2021 as continued investor optimism overcame an early quarter selloff driven by concerns of rising inflation and U.S. monetary policy tightening. Emerging market investments sold off in Q3 of 2021 as investor concerns surrounding economic growth in China were driven by the collapse of a large real estate investment company and a subsequent increase in regulatory pressures on some of China’s top performing technology and financial companies. Emerging market investments moved modestly higher in October 2021, but trailed Developed market investments as region-specific investments, such as in Latin America, struggled.

 

Investors showed a preference for value companies in emerging markets for the twelve months ending October 31, 2021, resulting in the high value factor1 exposure being a positive driver of Fund performance as value stocks outperformed growth stocks.2 In addition, the size factor3 was a positive driver of Fund performance over the twelve months as small cap stocks outperformed large cap stocks. Overall, the positive performance derived from the value and size factor exposures was the primary source of the Underlying Index’s outperformance against the MSCI EM IMI Net Index4 by 10.69%. Tracking difference between the Fund’s NAV and the Underlying Index’s total return for the 12-month period was -1.45%, which is reflective of the Fund’s management fee of -59 basis points (“bps”)5, stock selection/futures (-20 bps),

securities lending (+9 bps) and dividend tax differential (+1 bps), performance calculation differences between the Underlying Index and the Fund (+1 bp), India Capital Gains Taxes (-31 bps), and compounding of tracking error over time (-46 bps).

1 

The value factor is based on a belief that stocks that are inexpensive relative to some measure of fundamental value outperform those that are pricier.

 

2 

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

 

3 

The size factor 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. Large cap generally means stocks with a total capitalization of more than $10 billion. Mid cap is between $2 billion and $10 billion. Small cap is less than $2 billion in total capitalization.

 

4 

The Morgan Stanley Capital International Emerging Markets Investable Market Index (IMI) captures large, mid and small cap representation across 27 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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Table of Contents

 

FlexShares®   MANAGEMENT’S DISCUSSION OF FUND PERFORMANCE

US Quality Large Cap Index Fund Ticker:  QLC

 

 

CUMULATIVE PERFORMANCE

Through October 31, 2021

 

LOGO

 

AVERAGE ANNUAL TOTAL RETURN

For the period ended October 31, 2021

 

    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)

    43.21     16.51     15.83     13.98

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

    43.09     16.47     15.82     13.97

Northern Trust Quality Large Cap IndexSM

    43.77     16.80     16.17     14.31

S&P 500 Index

    42.91     21.51     18.95     17.46

 

All data as of 10/31/21. 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, 2022. 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 Quality Large Cap Index SM (the “Underlying Index”). The Underlying Index is designed to reflect the performance of a selection of companies that, in 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 float-adjusted market-capitalization weighted index of U.S. domiciled companies. As of October 31, 2021, there were 159 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 ended October 31, 2021, prices on U.S. investments generally traded higher. Through Q4 of 2020, U.S. investments rose as news about the COVID-19 (“COVID”) vaccine advancements were viewed by investors as a catalyst for a potential economic recovery. The passage of the federal fiscal stimulus package (Consolidated Appropriations Act, 2021) in December 2020 along with the U.S. Federal Reserve Bank’s actions to keep interest rates low while continuing quantitative easing measures also supported U.S. investments. Despite a volatile start in January 2021, U.S. domestic investments rose in Q1 of 2021 as several sectors that had previously struggled during the pandemic including energy, financials and industrials helped to lead investments higher. Domestic U.S. investments continued to advance in Q2 of 2021 as strong consumption growth and industrial production drove those investments higher. The May 2021 report of inflation, as measured by the Consumer Price Index (CPI), recorded the largest increase since June 1992, but at the time many investors viewed this as

 

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Table of Contents

 

FlexShares®   MANAGEMENT’S DISCUSSION OF FUND PERFORMANCE

US Quality Large Cap Index Fund (cont.)

 

 

PORTFOLIO ANALYSIS (cont.)

 

a transitory spike caused by increasing global economic recovery and supply chain disruptions. In Q3 of 2021, U.S. investments remained relatively flat despite strong corporate earnings as investors may have been concerned that future growth would not materialize, and that inflation may be more persistent than previously expected. Domestic U.S. investments advanced in October 2021 due to strong 3rd quarter earnings and robust consumer confidence.

 

Because U.S. domestic investments trended upwards during the 12 months ended October 31, 2021, we believe the value factor1 was a positive driver of Fund performance during the fiscal year ended October 31, 2021 as value stocks outperformed growth stocks2. In addition, we believe that investors showed a preference for high quality factor3 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 exposure4 of the Underlying Index was a negative driver of Fund performance as positive momentum companies underperformed negative momentum companies over the twelve months. Overall, the positive performance from the value and quality exposures offset the negative performance from the momentum exposure and the Underlying Index outperformed the S&P 500 Index5 by 0.86%. Tracking difference between the Fund’s NAV and the Underlying Index’s total return for the 12-month period was -56 basis points (“bps”)6, which is reflective of the management fee

(-32 bps), stock selection/futures (+1 bps), securities lending (+1 bps), performance calculation differences between the Underlying Index and the Fund (-1 bps) and compounding of tracking error over time (-25 bps).

1 

The value factor is based on a belief that stocks that are inexpensive relative to some measure of fundamental value outperform those that are pricier.

 

2 

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

 

3 

The quality factor is based on a belief that there are a set of clearly defined fundamental criteria that seek to identify companies with outstanding financial characteristics.

 

4 

Momentum in a stock is described as the tendency for the stock price to continue rising if it is going up and to continue declining if it is going down.

 

5 

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

 

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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Table of Contents

 

FlexShares®   MANAGEMENT’S DISCUSSION OF FUND PERFORMANCE

STOXX® US ESG Select Index Fund Ticker:  ESG

 

 

CUMULATIVE PERFORMANCE

Through October 31, 2021

 

LOGO

 

AVERAGE ANNUAL TOTAL RETURN

For the period ended October 31, 2021

 

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

 

 

 

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

    44.15     22.41     19.56     18.41

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

    44.12     22.44     19.56     18.42

STOXX® USA ESG Select KPIs Index

    44.04     22.12     18.97     17.82

Russell 1000® Index

    43.51     22.05     19.19     17.84

 

All data as of 10/31/21. 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, 2022. 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 aggregate, possess greater exposure to environmental, social and governance (“ESG”)1 characteristics relative to the STOXX® USA 900 Index, a float adjusted market-capitalization weighted index of U.S.-incorporated companies. As of October 31, 2021, there were 274 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 ended October 31, 2021, prices on U.S. investments generally traded higher. Through Q4 of 2020, U.S. investments rose as news about the COVID-19 (“COVID”) vaccine advancements were viewed by investors as a catalyst for a potential economic recovery. The passage of the federal fiscal stimulus package (Consolidated Appropriations Act, 2021) in December along with the U.S. Federal Reserve Bank’s actions to keep interest rates low while continuing quantitative easing measures also supported U.S. investments. Despite a volatile start in January, U.S. domestic investments rose in Q1 of 2021 as several sectors that had previously struggled during the pandemic including energy, financials and industrials helped to lead investments higher. Domestic U.S. investments continued to advance in Q2 of 2021 as strong consumption growth and industrial production drove those investments higher. The May 2021 report of inflation, as measured by the Consumer Price

 

1 

ESG investing is defined as utilizing environmental, social, and governance (ESG) criteria as a set of standards for a company’s operations that socially conscious investors use to screen potential investments.

 

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Table of Contents

 

FlexShares®   MANAGEMENT’S DISCUSSION OF FUND PERFORMANCE

STOXX® US ESG Select Index Fund (cont.)

 

 

 

 

 

 

PORTFOLIO ANALYSIS (cont.)

 

Index (CPI), recorded the largest increase since June 1992, but at the time many investors viewed this as a transitory spike caused by increasing global economic recovery and supply chain disruptions. In Q3 of 2021, U.S. investments remained relatively flat despite strong corporate earnings as investors may have been concerned that future growth would not materialize, and that inflation may be more persistent than previously expected. Domestic U.S. investments advanced in October due to strong 3rd quarter earnings and robust consumer confidence.

 

The Underlying Index had a positive total return during the 12 months ended October 31, 2021, and outperformed domestic equity markets, as defined by the Russell 1000 Index2, by 0.53%. The Underlying Index’s ESG-tilted approach led to beneficial overweight Fund exposure to the consumer discretionary, energy and healthcare sectors. Overweight exposure to the consumer staples and communication sectors detracted from Fund performance. Likewise, the ESG tilt led to underweights to the financials, utilities, technology and real estate sectors that were positive drivers of Fund performance but underweights to industrials and materials that detracted from Fund performance. Tracking difference between the Fund’s NAV and the Underlying Index’s total return for the 12-month period was +11 basis points (“bps”)3, which is reflective of the management fee (-32 bps), stock selection/futures (-9 bps), dividend tax differential (+46 bps) and compounding of tracking error over time (+6 bps).

 

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.

 

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Table of Contents

 

FlexShares®   MANAGEMENT’S DISCUSSION OF FUND PERFORMANCE

STOXX® Global ESG Select Index FundTicker:  ESGG

 

 

CUMULATIVE PERFORMANCE

Through October 31, 2021

 

LOGO

 

AVERAGE ANNUAL TOTAL RETURN

For the period ended October 31, 2021

 

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

 

 

 

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

    42.10     19.58     16.60     15.81

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

    41.84     19.48     16.66     15.86

STOXX® Global ESG Select KPIs Index

    42.22     19.66     16.64     15.83

MSCI World Index

    40.42     18.24     15.47     14.58

 

All data as of 10/31/21. 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, 2022. 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 aggregate, possess greater exposure to environmental, social and governance (“ESG”)1 characteristics relative to the STOXX® Global 1800 Index, the parent index, a float-adjusted market-capitalization weighted index of companies incorporated in the U.S. or in developed international markets. As of October 31, 2021, there were 888 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 ended October 31, 2021, prices on Global market investments (including U.S., Developed and Emerging markets) generally traded higher. Through Q4 of 2020, Global market investments moved higher as news about the COVID-19 (“COVID”) vaccine advancements were viewed by investors as a catalyst for a potential economic recovery. Global investments continued to rise over the 1st half of 2021 due to strong corporate earnings and positive economic data. Sectors that had previously struggled during the pandemic, including energy and financials, helped to lead investments higher. Global market investments moved lower in Q3 of 2021 as investor concerns surrounding economic growth in China were driven by the collapse of a large real estate investment company and a subsequent increase in regulatory pressures on some of China’s top performing technology and

 

1 

ESG investing is defined as utilizing environmental, social, and governance (ESG) criteria as a set of standards for a company’s operations that socially conscious investors use to screen potential investments.

 

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Table of Contents

 

FlexShares®   MANAGEMENT’S DISCUSSION OF FUND PERFORMANCE

STOXX® Global ESG Select Index Fund (cont.)

 

 

 

 

 

 

PORTFOLIO ANALYSIS (cont.)

 

financial companies. Inflation concerns stemming from supply chain bottlenecks and rising energy prices also drove Global market investments lower. Global market investments rebounded in October 2021 as lockdown policies enacted at the height of the pandemic were eased in many countries and latent consumer demand led to strong corporate earnings.

 

The Underlying Index had a positive total return during the 12 months ended October 31, 2021 and outperformed global equity markets, as defined by the MSCI World Index2, by 1.80%. The Underlying Index’s ESG-tilted approach led to beneficial overweight Fund exposure to the technology, consumer discretionary and energy sectors. The overweight exposure to the consumer staples sector detracted from Fund performance. Likewise, the ESG tilt led to underweights to the financials, utilities, industrials, communications, materials and real estate sectors that were positive drivers of Fund performance. Tracking difference between the Fund’s NAV and the Underlying Index’s total return for the 12-month period was -12 basis points (“bps”)3, which is reflective of the management fee (-42 bps), stock selection/futures (-5 bps), securities lending (+1 bps), dividend tax differential (+40 bps), and compounding of tracking error over time (-6 bps).

 

 

2 

The Morgan Stanley Capital International World Index captures large and mid-cap representation across 23 Developed Markets countries.

3 

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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Table of Contents

 

FlexShares® Morningstar®   MANAGEMENT’S DISCUSSION OF FUND PERFORMANCE

Global Upstream Natural Resources Index Fund Ticker:  GUNR

 

 

CUMULATIVE PERFORMANCE

Through October 31, 2021

 

LOGO

 

AVERAGE ANNUAL TOTAL RETURN

For the period ended October 31, 2021

 

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

 

 

 

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

    49.70     10.41     3.76     3.71

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

    49.58     10.43     3.85     3.74

Morningstar® Global Upstream Natural Resources IndexSM

    50.56     10.94     4.20     4.12

 

All data as of 10/31/21. 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, 2022. 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 domiciled in global developed or emerging markets (including the U.S.), as determined by Morningstar, Inc., the index provider, pursuant to its index methodology. The companies included in the Underlying Index have significant business operations in the ownership, management and/or production of natural resources in energy, agriculture, precious or industrial metals, timber and water resources sectors, as determined by the index provider, pursuant to its index methodology. As of October 31, 2021, 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 first half of the fiscal year ended October 31, 2021, commodity and natural resources prices in many sectors moved higher as news about the COVID-19 (“COVID”) vaccine advancements were viewed by investors as a catalyst for a potential economic recovery. Over the course of the 12-month period, while the U.S. dollar (USD) started off volatile, it ultimately weakened, and positively impacted U.S. investors as returns in local currencies of natural resources generally were enhanced by the falling of the USD. Emergence of the Delta variant of the COVID virus led to the reimposition of restrictions resulting in a slowdown of economic growth during the calendar third quarter. Global market investments (including U.S., Developed and Emerging markets) rebounded in October.

 

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Table of Contents

 

FlexShares® Morningstar®   MANAGEMENT’S DISCUSSION OF FUND PERFORMANCE

Global Upstream Natural Resources Index Fund (cont.)

 

 

PORTFOLIO ANALYSIS (cont.)

 

Production discipline by the Organization of Petroleum Exporting Countries (OPEC) and other oil producers, combined with increased energy demand as economies reopened, led to steadily increasing crude oil and natural gas price increases. West Texas Intermediate (“WTI”) crude oil prices began the fiscal year under $32 per barrel but ended the year over $80 per barrel1. Natural gas was up nearly 80%2 during the same time span, as the sector appeared to have finally worked off excess supplies that had been depressing prices.

 

Overall Industrial metals prices, such as copper, aluminum, zinc, nickel and tin were higher for the fiscal year. Prices moved higher powered by supply shortages as production was disrupted by COVID induced labor issues. Precious metals price performance was mixed as gold declined while silver posted a small increase. Metals used in electric vehicle and battery product such as cobalt and lithium saw strong price performance due to increasing demand and lack of supply.

 

Grains posted strong price performance, the highest seen in years in the U.S., as lower global supplies due to weather and COVID labor sourcing issues was met with increased demand for food inputs. Protein prices (cattle, hogs, poultry, and fish) also posted strong price performance. U.S. fertilizer chemical (potash, nitrogen, phosphate) were all materially higher on supply constraints and global demand for agricultural products. U.S. lumber prices were especially volatile during the fiscal year. Robust housing demand combined with lumber mill capacity issues drove lumber futures prices3 up 230% by early May 2021. Once these severe supply issues were overcome, lumber futures had declined by the end of the fiscal year.

For the 12-month period ended October 31, 2021, the Underlying Index underperformed the global natural resource equity markets, as defined by the S&P Global Natural Resources Index4, by -259 basis points (bps)5. Due to the Underlying Index’s focus on the upstream section of the natural resource supply chain, there was no Fund exposure to the steel sector which posted robust returns. Additionally, exposure to underperforming agricultural companies in China and other non-U.S. markets contributed to Fund underperformance. Positive contribution to Fund performance came from the upstream focus in timber and energy sectors. Tracking difference for the period between the Fund’s NAV and the Underlying Index was -86 bps, which is reflective of the Fund’s management fee (-46 bps), futures (-13 bps), foreign dividend tax differential treatment (+5 bps), securities lending (+4 bps), security selection (+3 bps), transaction costs (-3 bps), and other expenses including compounding of expenses during rising markets (-36 bps).

1 

Source: Bloomberg, USCRWTIC Index (October 31, 2020 – October 31, 2021).

 

2 

Source: Bloomberg, NGUSHHUB Commodity (October 31, 2020 – October 31, 2021).

 

3 

Source: Bloomberg, LB1 Lumber Generic Near Term Commodity Contract (October 31, 2020 – October 31, 2021).

 

4 

The Standard & Poor’s 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 commodity-related sectors: agribusiness, energy, and metals & mining.

 

5 

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

 

   FLEXSHARES ANNUAL REPORT     23  


Table of Contents

 

FlexShares® STOXX®   MANAGEMENT’S DISCUSSION OF FUND PERFORMANCE

Global Broad Infrastructure Index Fund Ticker:  NFRA

 

 

CUMULATIVE PERFORMANCE

Through October 31, 2021

 

LOGO

 

AVERAGE ANNUAL TOTAL RETURN

For the period ended October 31, 2021

 

    1 Year     3 Year     5 Year     Fund
Inception
10/8/2013
 
 

 

 

 

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

    22.85     11.25     8.69     7.38

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

    22.51     11.41     8.66     7.39

STOXX® Global Broad Infrastructure Index

    22.72     11.13     8.55     7.29

 

All data as of 10/31/21. 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, 2022. 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 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. Infrastructure companies generally include, without limitation, entities that own or operate location-specific capital-intensive assets characterized by high barriers to entry, essential services with inelastic demand, regulated pricing, and reliable or relatively stable revenue streams. As of October 31, 2021, there were 177 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 ended October 31, 2021, prices on Global market investments (including U.S., Developed and Emerging markets) generally traded higher. Through Q4 of 2020, Global market investments moved higher as news about the COVID-19 (“COVID”) vaccine advancements were viewed by investors as a catalyst for a potential economic recovery. Global investments continued to rise over the 1st half of 2021 due to strong corporate earnings and positive economic data. Sectors that had previously struggled during the pandemic, including energy and financials, helped to lead investments higher. Global market investments moved lower in Q3 of 2021 as investor concerns surrounding economic growth in China were driven by the collapse of a large real estate investment company and a subsequent increase in regulatory pressures on some of China’s top performing technology and

 

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Table of Contents

 

FlexShares® STOXX®   MANAGEMENT’S DISCUSSION OF FUND PERFORMANCE

Global Broad Infrastructure Index Fund (cont.)

 

 

 

 

 

 

PORTFOLIO ANALYSIS (cont.)

 

financial companies. Inflation concerns stemming from supply chain bottlenecks and rising energy prices also drove Global market investments lower. Global market investments rebounded in October 2021 as lockdown policies enacted at the height of the pandemic were eased in many countries and latent consumer demand led to strong corporate earnings.

 

The Underlying Index had a positive total return during the 12 months ended October 31, 2021, but underperformed the global equity real estate markets, as defined by the FTSE EPRA/NAREIT Developed Net Index1, by -1.94%. The Underlying Index’s exposures to the communication, transportation and energy sectors negatively contributed to Fund performance, while exposure to utilities and social infrastructure positively benefited Fund performance. The 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 Fund’s management fee (-47 bps), stock selection/futures (+6 bps), securities lending (+3 bps), dividend tax differential (+49 bps) and compounding of tracking error over time (+2 bps).

 

1 

The FTSE EPRA/Nareit Global Real Estate Index is an index designed to track the performance of listed real estate companies in both developed and emerging countries worldwide.

 

2 

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

 

   FLEXSHARES ANNUAL REPORT     25  


Table of Contents

 

FlexShares®   MANAGEMENT’S DISCUSSION OF FUND PERFORMANCE

Global Quality Real Estate Index Fund Ticker:  GQRE

 

 

CUMULATIVE PERFORMANCE

Through October 31, 2021

 

LOGO

 

AVERAGE ANNUAL TOTAL RETURN

For the period ended October 31, 2021

 

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

 

 

 

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

    40.58     9.87     7.37     7.30

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

    40.98     10.01     7.40     7.33

Northern Trust Global Quality Real Estate IndexSM

    40.18     9.76     7.29     7.21

FTSE EPRA/NAREIT Developed IndexSM

    42.12     9.64     7.00     6.23

 

All data as of 10/31/21. 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, 2022. 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 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 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, 2021, there were 140 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 ended October 31, 2021, prices on Global market investments (including U.S., Developed and Emerging markets) generally traded higher. Through Q4 of 2020, Global market investments moved higher as news about the COVID-19 (“COVID”) vaccine advancements were viewed by investors as a catalyst for a potential economic recovery. Global investments continued to rise over the 1st half of 2021 due to strong corporate earnings and positive economic data. Sectors that had previously struggled during the pandemic, including energy and financials, helped to lead investments higher. Global market investments moved lower in Q3 of 2021 as investor concerns surrounding economic growth in China were driven by the collapse of a large real

 

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Table of Contents

 

FlexShares®   MANAGEMENT’S DISCUSSION OF FUND PERFORMANCE

Global Quality Real Estate Index Fund (cont.)

 

 

PORTFOLIO ANALYSIS (cont.)

 

estate investment company and a subsequent increase in regulatory pressures on some of China’s top performing technology and financial companies. Inflation concerns stemming from supply chain bottlenecks and rising energy prices also drove Global market investments lower. Global market investments rebounded in October 2021 as lockdown policies enacted at the height of the pandemic were eased in many countries and latent consumer demand led to strong corporate earnings.

 

The Underlying Index had a positive total return during the 12 months ended October 31, 2021, but underperformed the global equity real estate markets, as defined by the FTSE EPRA/NAREIT Developed Net Index1, by -1.94%. The quality2 and momentum3 factor exposures of the Underlying Index were negative drivers of Fund performance while the value4 factor exposure was a positive driver of Fund performance. Overall, the positive exposure to value was not enough to offset the headwinds from the negative performance derived from the quality and momentum exposures. Tracking difference between the Fund’s NAV and the Underlying Index’s total return for the period was +40 basis points (“bps”)5, which is reflective of the Fund’s

management fee (-45 bps), stock selection/futures (+30 bps), securities lending (+2 bps), dividend tax differential (+35 bps), and compounding of tracking error over time (+18 bps).

 

1 

The FTSE EPRA/Nareit Global Real Estate Index is an index designed to track the performance of listed real estate companies in both developed and emerging countries worldwide.

 

2 

The quality factor is based on a belief that there are a set of clearly defined fundamental criteria that seek to identify companies with outstanding financial characteristics.

 

3 

Momentum in a stock is described as the tendency for the stock price to continue rising if it is going up and to continue declining if it is going down.

 

4 

The value factor is based on a belief that stocks that are inexpensive relative to some measure of fundamental value outperform those that are pricier.

 

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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Table of Contents

 

FlexShares®   MANAGEMENT’S DISCUSSION OF FUND PERFORMANCE

Real Assets Allocation Index Fund Ticker:  ASET

 

 

CUMULATIVE PERFORMANCE

Through October 31, 2021

 

LOGO

 

AVERAGE ANNUAL TOTAL RETURN

For the period ended October 31, 2021

 

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

 

 

 

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

    33.70 %*      11.27     8.52     8.11

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

    33.74     11.25     8.52     8.11

Northern Trust Real Assets Allocation IndexSM

    33.84     11.41     8.66     8.23

MSCI ACWI Index

    37.28     17.50     14.74     12.72

 

All data as of 10/31/21. 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, 2022. In the absence of such reimbursements, performance would be reduced. The gross expense ratio of the Fund is 1.05% and the net expense ratio is 0.57%. 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 Index (the “Underlying Index”). The Fund is a fund of funds and seeks its investment objective by investing primarily in the shares of other FlexShares ETFs (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, 2021, 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 and to manage the Fund. 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 ended October 31, 2021, prices on Global market investments (including U.S., Developed and Emerging markets) generally traded higher. Through Q4 of 2020, Global market investments

 

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FlexShares®   MANAGEMENT’S DISCUSSION OF FUND PERFORMANCE

Real Assets Allocation Index Fund (cont.)

 

 

 

 

 

 

 

* 

The return shown is based on net asset value calculated for shareholder transactions and may differ from the return shown in the financial highlights, which reflects adjustments made to the net asset value in accordance with accounting principles generally accepted in the United States of America. The net asset value was $33.66 as of October 31, 2021.

 

PORTFOLIO ANALYSIS (cont.)

 

moved higher as news about the COVID-19 (“COVID”) vaccine advancements were viewed by investors as a catalyst for a potential economic recovery. Global investments continued to rise over the 1st half of 2021 due to strong corporate earnings and positive economic data. Sectors that had previously struggled during the pandemic, including energy and financials, helped to lead investments higher. Global market investments moved lower in Q3 of 2021 as investor concerns surrounding economic growth in China were driven by the collapse of a large real estate investment company and a subsequent increase in regulatory pressures on some of China’s top performing technology and financial companies. Inflation concerns stemming from supply chain bottlenecks and rising energy prices also drove Global market investments lower. Global market investments rebounded in October as lockdown policies enacted at the height of the pandemic were eased in many countries and latent consumer demand led to strong corporate earnings.

 

The Underlying Index had a positive total return during the 12 months ended October 31, 2021, but underperformed the global equity markets, as defined by the MSCI All Country World Index (ACWI)1 by -4.04%. The Fund underperformed due to the Underlying Index’s greater allocation to infrastructure relative to its real estate and natural resource allocations. Tracking difference between the Fund’s NAV and the Underlying Index’s total return for the period was -14 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 (+46 bps), and compounding of tracking error over time (-3 bps).

 

1 

The Morgan Stanley Capital International All Country World Index is a market-capitalization-weighted index maintained by Morgan Stanley Capital International (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.

 

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FlexShares®   MANAGEMENT’S DISCUSSION OF FUND PERFORMANCE

Quality Dividend Index Fund Ticker:  QDF

 

 

CUMULATIVE PERFORMANCE

Through October 31, 2021

 

LOGO

 

AVERAGE ANNUAL TOTAL RETURN

For the period ended October 31, 2021

 

    1 Year     3 Year     5 Year     Fund
Inception
12/14/2012
 
 

 

 

 

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

    37.27     13.04     12.88     13.26

FlexShares Quality Dividend Index Fund (Based on Market Price)

    37.20     13.04     12.86     13.26

Northern Trust Quality Dividend IndexSM

    37.76     13.79     13.52     13.81

Russell 1000® Index

    43.51     22.05     19.19     16.59

 

All data as of 10/31/21. 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, 2022. 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 Index SM (the “Underlying Index”). The Underlying Index is designed to reflect the performance of a selection of companies that, in aggregate, possess greater financial strength and stability characteristics relative to the Northern Trust 1250 Index (the “Parent Index”)1. In addition, the Underlying Index is designed to select companies from the Parent Index that in the aggregate have the potential to generate income in excess of the income generated by securities in the Parent Index with a beta2 that is similar to that of the Parent Index. As of October 31, 2021, there were 126 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 ended October 31, 2021, prices on U.S. investments generally traded higher. Through Q4 of 2020, U.S. investments rose as news about the COVID-19 (“COVID”) vaccine advancements were viewed by investors as a catalyst for a potential economic recovery. The passage of the federal fiscal stimulus package (Consolidated Appropriations Act, 2021) in December 2020 along with the U.S. Federal Reserve Bank’s actions to keep interest rates

 

1 

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

 

2 

A statistical measure of the volatility, or sensitivity, of rates of return on a portfolio or security compared to a market index. 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.

 

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Table of Contents

 

FlexShares®   MANAGEMENT’S DISCUSSION OF FUND PERFORMANCE

Quality Dividend Index Fund (cont.)

 

 

PORTFOLIO ANALYSIS (cont.)

 

low while continuing quantitative easing measures also supported U.S. investments. Despite a volatile start in January 2021, U.S. domestic investments rose in Q1 of 2021 as several sectors that had previously struggled during the pandemic including energy, financials and industrials helped to lead investments higher. Domestic U.S. investments continued to advance in Q2 as strong consumption growth and industrial production drove those investments higher. The May 2021 report of inflation, as measured by the Consumer Price Index (CPI), recorded the largest increase since June 1992, but at the time many investors viewed this as a transitory spike caused by increasing global economic recovery and supply chain disruptions. In Q3, U.S. investments remained relatively flat despite strong corporate earnings as investors may have been concerned that future growth would not materialize, and that inflation may be more persistent than previously expected. Domestic U.S. investments advanced in October 2021 due to strong 3rd quarter earnings and robust consumer confidence.

 

U.S. domestic investments trended upwards during the 12 months ended October 31, 2021, and we believe the quality factor3 was a negative driver of Fund performance during the fiscal year ended October 31, 2021. As the U.S. economy recovered from the global lockdown, however, U.S. investments expanded in several areas hardest hit during the pandemic. Because of this expansion during the second half of the fiscal year, the dividend yield factor4 became a positive driver of Fund performance as high yielding investments outperformed low yielding and non-dividend paying investments. Overall, the positive performance derived from the dividend factor was not enough to offset the negative performance derived from the quality

exposure. Consequently, the Underlying Index underperformed the Russell 1000® Index5 by -5.75%. Tracking difference between the Fund’s NAV and the Underlying Index’s total return for the 12-month period was -49 basis points (“bps”)6, which is reflective of the management fee (-37 bps), securities lending (+1 bps), performance calculation differences between the Underlying Index and the Fund (+1 bps), and compounding of tracking error over time (-14 bps).

3 

The quality factor is based on a belief that there are a set of clearly defined fundamental criteria that seek to identify companies with outstanding financial characteristics.

 

4 

Dividend yield factor is the percentage of an investments price that a company is projected to pay out as dividends.

 

5 

Russell 1000® Index is a free float-adjusted market capitalization index which measures the performance of the 1,000 largest companies in the Russell 3000 Index, based on market capitalization.

 

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®   MANAGEMENT’S DISCUSSION OF FUND PERFORMANCE

Quality Dividend Defensive Index Fund Ticker:  QDEF

 

 

CUMULATIVE PERFORMANCE

Through October 31, 2021

 

LOGO

 

AVERAGE ANNUAL TOTAL RETURN

For the period ended October 31, 2021

 

    1 Year     3 Year     5 Year     Fund
Inception
12/14/2012
 
 

 

 

 

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

    34.28     12.64     12.78     13.05

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

    34.19     12.63     12.77     13.05

Northern Trust Quality Dividend Defensive IndexSM

    34.77     13.14     13.44     13.62

Russell 1000® Index

    43.51     22.05     19.19     16.59

 

All data as of 10/31/21. 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, 2022. 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 aggregate, possess greater financial strength and stability characteristics relative to the Northern Trust 1250 Index (the “Parent Index”)1. In addition, the Underlying Index is designed to select companies from the Parent Index that in the aggregate have the potential to generate income in excess of the income generated by securities in the Parent Index with a beta2 that is lower in relation to that of the Parent Index. As of October 31, 2021, there were 126 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 ended October 31, 2021, prices on U.S. investments generally traded higher. Through Q4 of 2020, U.S. investments rose as news about the COVID-19 (“COVID”) vaccine advancements were viewed by investors as a catalyst for a potential economic recovery. The passage of the federal fiscal stimulus package (Consolidated Appropriations Act, 2021) in December 2020 along with the U.S. Federal Reserve Bank’s actions to keep interest rates

 

1 

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

 

2 

A statistical measure of the volatility, or sensitivity, of rates of return on a portfolio or security compared to a market index. 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.

 

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Table of Contents

 

FlexShares®   MANAGEMENT’S DISCUSSION OF FUND PERFORMANCE

Quality Dividend Defensive Index Fund (cont.)

 

 

PORTFOLIO ANALYSIS (cont.)

 

low while continuing quantitative easing measures also supported U.S. investments. Despite a volatile start in January 2021, U.S. domestic investments rose in Q1 of 2021 as several sectors that had previously struggled during the pandemic including energy, financials and industrials helped to lead investments higher. Domestic U.S. investments continued to advance in Q2 of 2021 as strong consumption growth and industrial production drove those investments higher. The May 2021 report of inflation, as measured by the Consumer Price Index (CPI), recorded the largest increase since June 1992, but at the time many investors viewed this as a transitory spike caused by increasing global economic recovery and supply chain disruptions. In Q3 of 2021, U.S. investments remained relatively flat despite strong corporate earnings as investors may have been concerned that future growth would not materialize, and that inflation may be more persistent than previously expected. Domestic U.S. investments advanced in October 2021 due to strong 3rd quarter earnings and robust consumer confidence.

 

U.S. domestic investments trended upwards during the 12 months ended October 31, 2021, and we believe both the quality factor3 and the lower beta exposure were negative drivers of Fund performance during the fiscal year ended October 31, 2021. As the U.S. economy recovered from the global lockdown, however, U.S. investments expanded in several areas hardest hit during the pandemic. Because of this expansion during the second half of the fiscal year, the dividend yield factor4 became a positive driver of Fund performance as high yielding investments outperformed low yielding and non-dividend paying investments. Overall, the positive performance derived from the dividend factor was not enough to offset the negative performance derived from the quality and lower beta exposure.

Consequently, the Underlying Index underperformed the Russell 1000® Index5 by -8.74%. Tracking difference between the Fund’s NAV and the Underlying Index’s total return for the 12-month period was -49 basis points (“bps”)6, which is reflective of the management fee (-37 bps), stock selection/futures (+4 bps), securities lending (+1 bps), and compounding of tracking error over time (-17 bps).

 

3 

The quality factor is based on a belief that there are a set of clearly defined fundamental criteria that seek to identify companies with outstanding financial characteristics.

 

4 

Dividend yield factor is the percentage of an investments price that a company is projected to pay out as dividends.

 

5 

Russell 1000® Index is a free float-adjusted market capitalization index which measures the performance of the 1,000 largest companies in the Russell 3000 Index, based on market capitalization.

 

6 

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

 

   FLEXSHARES ANNUAL REPORT     33  


Table of Contents

 

FlexShares®   MANAGEMENT’S DISCUSSION OF FUND PERFORMANCE

Quality Dividend Dynamic Index Fund Ticker:  QDYN

 

 

CUMULATIVE PERFORMANCE

Through October 31, 2021

 

LOGO

 

AVERAGE ANNUAL TOTAL RETURN

For the period ended October 31, 2021

 

    1 Year     3 Year     5 Year     Fund
Inception
12/14/2012
 
 

 

 

 

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

    45.38     17.58     15.46     14.13

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

    45.32     17.59     15.44     14.13

Northern Trust Quality Dividend Dynamic IndexSM

    46.03     17.95     15.83     14.51

Russell 1000® Index

    43.51     22.05     19.19     16.59

 

All data as of 10/31/21. 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, 2022. 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 Dynamic IndexSM (the “Underlying Index”). The Underlying Index is designed to reflect the performance of a selection of companies that, in aggregate, possess greater financial strength and stability characteristics relative to the Northern Trust 1250 Index (the “Parent Index”)1. In addition, the Underlying Index is designed to select companies from the Parent Index that in the aggregate have the potential to generate income in excess of the income generated by securities in the Parent Index with a beta2 that is higher in relation to that of the Parent Index. As of October 31, 2021, there were 128 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 ended October 31, 2021, prices on U.S. investments generally traded higher. Through Q4 of 2020, U.S. investments rose as news about the COVID-19 (“COVID”) vaccine advancements were viewed by investors as a catalyst for a potential economic recovery. The passage of the federal fiscal stimulus package (Consolidated Appropriations Act, 2021) in December 2020 along with the U.S. Federal Reserve Bank’s actions to keep interest rates low while continuing quantitative easing

 

1 

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

 

2 

A statistical measure of the volatility, or sensitivity, of rates of return on a portfolio or security compared to a market index. 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.

 

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Table of Contents

 

FlexShares®   MANAGEMENT’S DISCUSSION OF FUND PERFORMANCE

Quality Dividend Dynamic Index Fund (cont.)

 

 

PORTFOLIO ANALYSIS (cont.)

 

measures also supported U.S. investments. Despite a volatile start in January 2021, U.S. domestic investments rose in Q1 of 2021 as several sectors that had previously struggled during the pandemic including energy, financials and industrials helped to lead investments higher. Domestic U.S. investments continued to advance in Q2 of 2021 as strong consumption growth and industrial production drove those investments higher. The May 2021 report of inflation, as measured by the Consumer Price Index (CPI), recorded the largest increase since June 1992, but at the time many investors viewed this as a transitory spike caused by increasing global economic recovery and supply chain disruptions. In Q3 of 2021, U.S. investments remained relatively flat despite strong corporate earnings as investors may have been concerned that future growth would not materialize, and that inflation may be more persistent than previously expected. Domestic U.S. investments advanced in October 2021 due to strong 3rd quarter earnings and robust consumer confidence.

 

U.S. domestic investments trended upwards during the 12 months ended October 31, 2021, and we believe the quality factor3 was a negative driver of Fund performance during the fiscal year ended October 31, 2021. As the U.S. economy recovered from the global lockdown, however, U.S. investments expanded in several areas hardest hit during the pandemic. Because of this expansion during the second half of the fiscal year, the dividend yield factor4 and the higher beta exposure were positive drivers of Fund performance as high yielding investments outperformed low yielding and non-dividend paying investments and higher beta investments generally fared better than lower beta investments. Consequently, the Underlying Index outperformed the Russell 1000® Index5 by 2.52%. Tracking difference between the Fund’s NAV and the Underlying Index’s total return for the 12-month period was -65 basis points (“bps”)6, which is reflective

of the management fee (-37 bps), stock selection/futures (-20 bps), securities lending (+1 bps), performance calculation differences between the Underling Index and the Fund (+1 bps), and compounding of tracking error over time (-10 bps).

3 

The quality factor is based on a belief that there are a set of clearly defined fundamental criteria that seek to identify companies with outstanding financial characteristics.

 

4 

Dividend yield factor is the percentage of an investments price that a company is projected to pay out as dividends.

 

5 

Russell 1000® Index is a free float-adjusted market capitalization index which measures the performance of the 1,000 largest companies in the Russell 3000 Index, based on market capitalization.

 

6 

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

 

   FLEXSHARES ANNUAL REPORT     35  


Table of Contents

 

FlexShares®   MANAGEMENT’S DISCUSSION OF FUND PERFORMANCE

International Quality Dividend Index Fund Ticker:  IQDF

 

 

CUMULATIVE PERFORMANCE

Through October 31, 2021

 

LOGO

 

AVERAGE ANNUAL TOTAL RETURN

For the period ended October 31, 2021

 

    1 Year     3 Year     5 Year     Fund
Inception
4/12/2013
 
 

 

 

 

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

    32.42     9.34     7.29     4.40

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

    32.85     9.69     7.35     4.46

Northern Trust International Quality Dividend IndexSM

    32.93     9.62     7.52     4.77

MSCI ACWI ex USA Index

    29.66     12.02     9.79     6.14

 

All data as of 10/31/21. 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, 2022. 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 aggregate, possess greater financial strength and stability characteristics relative to the Northern Trust International Large Cap Index (the “Parent Index”)1. In addition, the Underlying Index is designed to select companies from the Parent Index that in the aggregate have the potential to generate income in excess of the income generated by securities in the Parent Index with a beta2 that is similar to that of the Parent Index. As of October 31, 2021, there were 226 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 ended October 31, 2021, prices on International market investments (including Developed and Emerging markets) generally traded higher. Through Q4 of 2020, International market investments moved higher as news about the COVID-19 (“COVID”) vaccine advancements were viewed by investors as a catalyst for a potential economic recovery. International investments continued to rise over the 1st half of 2021 due to strong corporate earnings

 

1 

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.

 

2 

A statistical measure of the volatility, or sensitivity, of rates of return on a portfolio or security compared to a market index. 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.

 

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Table of Contents

 

FlexShares®   MANAGEMENT’S DISCUSSION OF FUND PERFORMANCE

International Quality Dividend Index Fund (cont.)

 

 

PORTFOLIO ANALYSIS (cont.)

 

and positive economic data. Sectors that had previously struggled during the pandemic, including energy and financials, helped to lead investments higher. International market investments moved lower in Q3 of 2021 as investor concerns surrounding economic growth in China were driven by the collapse of a large real estate investment company and a subsequent increase in regulatory pressures on some of China’s top performing technology and financial companies. Inflation concerns stemming from supply chain bottlenecks and rising energy prices also drove International market investments lower. International market investments rebounded in October 2021 as lockdown policies enacted at the height of the pandemic were eased in many countries and latent consumer demand led to strong corporate earnings.

 

International investments trended upwards during the 12 months ended October 31, 2021, and we believe the quality factor3 was a negative driver of Fund performance during the fiscal year ended October 31, 2021. As international economies recovered from the global lockdown, however, International investments expanded in several areas hardest hit during the pandemic. Because of this expansion during the second half of the fiscal year, the dividend yield factor4 became a positive driver of Fund performance as high yielding investments outperformed low yielding and non-dividend paying investments. Overall, the positive performance derived from the dividend factor offset the negative performance derived from the quality exposure. Consequently, the Underlying Index overperformed the MSCI ACWI ex USA Index5 by 3.27%. Tracking difference between the Fund’s NAV and the Underlying Index’s total return for the 12-month period was -51 basis points (“bps”)6, which is reflective

of the Fund’s management fee (-47 bps), stock selection/futures (+2 bps), securities lending (+3 bps), performance calculation differences between the Underlying Index and the Fund (+1 bps), and compounding of tracking error over time (-10 bps).

 

3 

The quality factor is based on a belief that there are a set of clearly defined fundamental criteria that seek to identify companies with outstanding financial characteristics.

 

4 

Dividend yield factor is the percentage of an investments price that a company is projected to pay out as dividends.

 

5 

The Morgan Stanley Capital International All Country World Index Ex-U.S. is a market-capitalization-weighted index maintained by Morgan Stanley Capital International (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.

 

   FLEXSHARES ANNUAK REPORT     37  


Table of Contents

 

FlexShares® International   MANAGEMENT’S DISCUSSION OF FUND PERFORMANCE

Quality Dividend Defensive Index Fund Ticker:  IQDE

 

 

CUMULATIVE PERFORMANCE

Through October 31, 2021

 

LOGO

 

AVERAGE ANNUAL TOTAL RETURN

For the period ended October 31, 2021

 

    1 Year     3 Year     5 Year     Fund
Inception
4/12/2013
 
 

 

 

 

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

    29.03     8.16     5.98     3.56

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

    28.97     8.31     5.90     3.55

Northern Trust International Quality Dividend Defensive IndexSM

    29.50     8.47     6.23     4.06

MSCI ACWI ex USA Index

    29.66     12.02     9.79     6.14

 

All data as of 10/31/21. 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, 2022. 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 aggregate, possess greater financial strength and stability characteristics relative to the Northern Trust International Large Cap Index (the “Parent Index”)1. In addition, the Underlying Index is designed to select companies from the Parent Index that in the aggregate have the potential to generate income in excess of the income generated by securities in the Parent Index with a beta2 that is less than that of the Parent Index. As of October 31, 2021, there were 210 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 ended October 31, 2021, prices on International market investments (including Developed and Emerging markets) generally traded higher. Through Q4 of 2020, International market investments moved higher as news about the COVID-19 (“COVID”) vaccine advancements were viewed by investors as a catalyst for a potential economic recovery. International investments continued to rise over the 1st half of 2021 due to strong corporate earnings

 

1 

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.

 

2 

A statistical measure of the volatility, or sensitivity, of rates of return on a portfolio or security compared to a market index. 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.

 

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Table of Contents

 

FlexShares® International   MANAGEMENT’S DISCUSSION OF FUND PERFORMANCE

Quality Dividend Defensive Index Fund (cont.)

 

 

PORTFOLIO ANALYSIS (cont.)

 

and positive economic data. Sectors that had previously struggled during the pandemic, including energy and financials, helped to lead investments higher. International market investments moved lower in Q3 of 2021 as investor concerns surrounding economic growth in China were driven by the collapse of a large real estate investment company and a subsequent increase in regulatory pressures on some of China’s top performing technology and financial companies. Inflation concerns stemming from supply chain bottlenecks and rising energy prices also drove International market investments lower. International market investments rebounded in October 2021 as lockdown policies enacted at the height of the pandemic were eased in many countries and latent consumer demand led to strong corporate earnings.

 

International investments trended upwards during the 12 months ended October 31, 2021, and we believe the quality factor4 and the lower beta exposure were negative drivers of Fund performance during the fiscal year ended October 31, 2021. As international economies recovered from the global lockdown, however, International investments expanded in several areas hardest hit during the pandemic. Because of this expansion during the second half of the fiscal year, the dividend yield factor4 became a positive driver of Fund performance as high yielding investments outperformed low yielding and non-dividend paying investments. Overall, the positive performance derived from the dividend factor could not offset the negative performance derived from the quality and lower beta exposure. Consequently, the Underlying Index underperformed the MSCI ACWI ex USA Index5 by -16 basis points (“bps”)6. Tracking difference between the Fund’s NAV and the Underlying Index’s total return for the 12-month period was

-47 bps, which is reflective of the Fund’s management fee (-47 bps), stock selection/futures (+5 bps), securities lending (+3 bps), dividend tax differential (-1 bps), performance calculation differences between the Underlying Index and the Fund (+1 bps), and compounding of tracking error over time (-8 bps).

 

3 

The quality factor is based on a belief that there are a set of clearly defined fundamental criteria that seek to identify companies with outstanding financial characteristics.

 

4 

Dividend yield factor is the percentage of an investments price that a company is projected to pay out as dividends.

 

5 

The Morgan Stanley Capital International All Country World Index Ex-U.S. is a market-capitalization-weighted index maintained by Morgan Stanley Capital International (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.

 

   FLEXSHARES ANNUAK REPORT     39  


Table of Contents

 

FlexShares® International   MANAGEMENT’S DISCUSSION OF FUND PERFORMANCE

Quality Dividend Dynamic Index Fund Ticker:  IQDY

 

 

CUMULATIVE PERFORMANCE

Through October 31, 2021

 

LOGO

 

AVERAGE ANNUAL TOTAL RETURN

For the period ended October 31, 2021

 

    1 Year     3 Year     5 Year     Fund
Inception
4/12/2013
 
 

 

 

 

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

    39.87     13.13     9.45     6.34

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

    40.37     13.56     9.61     6.42

Northern Trust International Quality Dividend Dynamic IndexSM

    40.44     13.58     9.80     6.80

MSCI ACWI ex USA Index

    29.66     12.02     9.79     6.14

 

All data as of 10/31/21. 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, 2022. 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 aggregate, possess greater financial strength and stability characteristics relative to the Northern Trust International Large Cap Index (the “Parent Index”)1. In addition, the Underlying Index is designed to select companies from the Parent Index that in the aggregate have the potential to generate income in excess of the income generated by securities in the Parent Index with a beta2 that is higher than that of the Parent Index. As of October 31, 2021, there were 210 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 ended October 31, 2021, prices on International market investments (including Developed and Emerging markets) generally traded higher. Through Q4 of 2020, International market investments moved higher as news about the COVID-19 (“COVID”) vaccine advancements were viewed by investors as a catalyst for a potential economic recovery. International investments continued to rise over the 1st half of 2021 due to strong corporate earnings

 

1 

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.

 

2 

A statistical measure of the volatility, or sensitivity, of rates of return on a portfolio or security compared to a market index. 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.

 

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Table of Contents

 

FlexShares® International   MANAGEMENT’S DISCUSSION OF FUND PERFORMANCE

Quality Dividend Dynamic Index Fund (cont.)

 

 

PORTFOLIO ANALYSIS (cont.)

 

and positive economic data. Sectors that had previously struggled during the pandemic, including energy and financials, helped to lead investments higher. International market investments moved lower in Q3 of 2021 as investor concerns surrounding economic growth in China were driven by the collapse of a large real estate investment company and a subsequent increase in regulatory pressures on some of China’s top performing technology and financial companies. Inflation concerns stemming from supply chain bottlenecks and rising energy prices also drove International market investments lower. International market investments rebounded in October 2021 as lockdown policies enacted at the height of the pandemic were eased in many countries and latent consumer demand led to strong corporate earnings.

 

International investments trended upwards during the 12 months ended October 31, 2021, and we believe the quality factor3 was a negative driver of Fund performance during the fiscal year ended October 31, 2021. As international economies recovered from the global lockdown, however, International investments expanded in several areas hardest hit during the pandemic. Because of this expansion during the second half of the fiscal year, the dividend yield factor4 and the higher beta exposure were positive drivers of Fund performance as high yielding investments outperformed low yielding and non-dividend paying investments and higher beta investments generally fared better than lower beta investments. Consequently, the Underlying Index outperformed the MSCI ACWI ex USA Index5 by 10.78%. Tracking difference between the Fund’s NAV and the Underlying Index’s total return for the 12-month period was -57 basis points (“bps”)6, which is reflective of the

Fund’s management fee (-47 bps), stock selection/futures (-2 bps), securities lending (+7 bps), dividend tax differential (-1 bps), and compounding of tracking error over time (-14 bps).

 

3 

The quality factor is based on a belief that there are a set of clearly defined fundamental criteria that seek to identify companies with outstanding financial characteristics.

 

4 

Dividend yield factor is the percentage of an investments price that a company is projected to pay out as dividends.

 

5 

The Morgan Stanley Capital International All Country World Index Ex-U.S. is a market-capitalization-weighted index maintained by Morgan Stanley Capital International (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.

 

   FLEXSHARES ANNUAL REPORT     41  


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, 2021

 

LOGO

 

AVERAGE ANNUAL TOTAL RETURN

For the period ended October 31, 2021

 

    1 Year     3 Year     5 Year     Fund
Inception
9/19/2011
 
 

 

 

 

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

    6.91 %*      6.01     3.56     1.97

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

    6.95     6.05     3.58     1.98

iBoxx 3-Year Target Duration TIPS Index

    7.03     6.21     3.75     2.13

 

All data as of 10/31/21. 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, 2022. 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 reflects 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 duration,1 as defined by IHS Markit 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, 2021, there were 18 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.

 

During the first half of the fiscal year ended October 31, 2021, fixed income investments moved higher as news about the COVID-19 (“COVID”) vaccine advancements were viewed by investors as a catalyst for a potential economic recovery. Quarterly Gross Domestic Product (GDP) as reported by the U.S. Bureau of Economic Analysis rebounded to 4.5% in the fourth quarter of 2020 followed by 6.3% and 6.7% in the first and second quarters of 2021. Emergence of the Delta variant of the COVID virus led to the reimposition of restrictions resulting in a slowdown of GDP to only 2.0% during the calendar third quarter.

 

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.

 

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Table of Contents

 

FlexShares® iBoxx®   MANAGEMENT’S DISCUSSION OF FUND PERFORMANCE

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

 

 

PORTFOLIO ANALYSIS (cont.)

 

The U.S. yield curve2 steepened in early calendar year 2021 as prospects for economic reopening with the pending distribution of COVID vaccines and the runoff elections for two senate seats in Georgia. Investors began to consider the positive impact on markets of the potential for additional fiscal stimulus with one party in control of the House, Senate and Executive Branch.

 

Short-term Treasury yields remained at low levels despite the Federal Reserve (Fed) statements indicating the possibility of decreasing the purchases of Treasury and Agency Mortgage Backed Securities (MBS) and the highest consumer price inflation in thirteen years. By the summer of 2021, yields were lower as increased infections from the COVID Delta variant weighed on economic growth outlooks.

 

By fiscal year-end, 1-month and 3-month Treasury yields were down a couple of basis points (bps)3, 1-year Treasury yields were unchanged, while intermediate- and long-term yields were higher with 2-year yields up +34 bps, 5-year yields up +80 bps, 10-year yields up +68 bps, 30-year yields up +27 bps.

 

For the fiscal year ended October 31, 2021, the Consumer Price Index (CPI) ended the year meaningfully higher at a 6.2% rate which was the highest level since July 30, 2008 and up from 1.2% for the fiscal year ended October 31, 20204. Our opinion is that commodity prices in general moved higher during the summer of 2020 as economies slowly reopened and consumer demand was met by supply shortages as previous COVID shutdowns of production facilities

ultimately led to higher prices for raw materials. We believe that inflation expectations rose further in early 2021 as the Georgia Senate run-off elections drove expectations for even further fiscal stimulus potentially driving consumer demand higher. Rising wages combined with increasing energy and food prices drove annual CPI above 5% in the summer of 2021. Within the CPI measure, core inflation ex-food and energy prices were higher by 4.6%. As measured by the CPI, individual items were up substantially including energy prices 30% higher, food items up 5.3% and shelter prices showed an increase of 3.5%5.

 

During the fiscal year, real yields fell on lower nominal treasury yields. Short-term real yields6 fell more than long-term yields in conjunction with the Fed decision to cut the Federal funds rate. 1-year real yields fell 132 bps, while the 5-, 10-, and 30-year real yields were lower by 128 bps, 97 bps, and 77 bps, respectively7.

 

Highest inflation in 30 years along with falling real interest rates during the fiscal year led to positive 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 Index8 by +22 bps due to lower duration positioning of the Underlying Index against the backdrop of falling real interest rates. Tracking difference between the Fund’s NAV and the Underlying Index for the 12-month period was -12 bps, reflective of the Fund’s management fee (-18 bps), duration and curve positioning (+1 bps), security selection (-4 bps), trading and pricing differences (+15 bps), and other factors (-6 bps).

 

* 

The return shown is based on net asset value calculated for shareholder transactions and may differ from the return shown in the financial highlights, which reflects adjustments made to the net asset value in accordance with accounting principles generally accepted in the United States of America. The net asset value was $26.38 as of October 31, 2021.

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 

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

 

4 

U.S. Bureau of Labor Statistics, Consumer Price Index, October 31, 2021 and October 31, 2020, respectively.

 

5 

U.S. Bureau of Labor Statistics, Consumer Price Index, June 30, 2021.

 

6 

A real yield is the yield to the investor that has been adjusted to remove the effects of inflation.

 

7 

Bloomberg, In this analysis we are making a comparison between the difference in the real yield rates of the 1-year, 5-year, 10-year and 30-year maturities using data available as of January 1, 2021 and October 31, 2021.

 

8 

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

 

   FLEXSHARES ANNUAL REPORT     43  


Table of Contents

 

FlexShares® iBoxx®   MANAGEMENT’S DISCUSSION OF FUND PERFORMANCE

5-Year Target Duration TIPS Index Fund Ticker:  TDTF

 

 

CUMULATIVE PERFORMANCE

Through October 31, 2021

 

LOGO

 

AVERAGE ANNUAL TOTAL RETURN

For the period ended October 31, 2021

 

    1 Year     3 Year     5 Year     Fund
Inception
9/19/2011
 
 

 

 

 

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

    6.85 %*      7.92     4.38     2.76

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

    6.96     7.96     4.40     2.77

iBoxx 5-Year Target Duration TIPS Index

    7.02     8.17     4.58     2.92

 

All data as of 10/31/21. 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, 2022. 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 reflects 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 duration,1 as defined by IHS Markit 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, 2021, 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.

 

During the first half of the fiscal year ended October 31, 2021, fixed income investments moved higher as news about the COVID-19 (“COVID”) vaccine advancements were viewed by investors as a catalyst for a potential economic recovery. Quarterly Gross Domestic Product (GDP) as reported by the U.S. Bureau of Economic Analysis rebounded to 4.5% in the fourth quarter of 2020 followed by 6.3% and 6.7% in the first and second quarters of 2021. Emergence of the Delta variant of the COVID virus led to the reimposition of restrictions resulting in a slowdown of GDP to only 2.0% during the calendar third quarter.

 

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.

 

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FlexShares® iBoxx®   MANAGEMENT’S DISCUSSION OF FUND PERFORMANCE

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

 

 

PORTFOLIO ANALYSIS (cont.)

 

The U.S. yield curve2 steepened in early calendar year 2021 as prospects for economic reopening with the pending distribution of COVID vaccines and the runoff elections for two senate seats in Georgia. Investors began to consider the positive impact on markets of the potential for additional fiscal stimulus with one party in control of the House, Senate and Executive Branch.

 

Short-term Treasury yields remained at low levels despite the Federal Reserve (Fed) statements indicating the possibility of decreasing the purchases of Treasury and Agency Mortgage Backed Securities (MBS) and the highest consumer price inflation in thirteen years. By the summer of 2021, yields were lower as increased infections from the COVID Delta variant weighed on economic growth outlooks.

 

By fiscal year-end, 1-month and 3-month Treasury yields were down a couple of basis points (bps)3, 1-year Treasury yields were unchanged, while intermediate- and long-term yields were higher with 2-year yields up +34 bps, 5-year yields up +80 bps, 10-year yields up +68 bps, and 30-year yields up +27 bps.

 

For the fiscal year ended October 31, 2021, the Consumer Price Index (CPI) ended the year meaningfully higher at a 6.2% rate which was the highest level since July 30, 2008 and up from 1.2% for the fiscal year ended October 31, 20204. Our opinion is that commodity prices in general moved higher during the summer of 2020 as economies slowly reopened and consumer demand was met by supply shortages as previous COVID shutdowns of production facilities

ultimately led to higher prices for raw materials. We believe that inflation expectations rose further in early 2021 as the Georgia Senate run-off elections drove expectations for even further fiscal stimulus potentially driving consumer demand higher. Rising wages combined with increasing energy and food prices drove annual CPI above 5% in the summer of 2021. Within the CPI measure, core inflation ex-food and energy prices were higher by 4.6%. As measured by the CPI, individual items were up substantially including energy prices 30% higher, food items up 5.3% and shelter prices showed an increase of 3.5%5.

 

During the fiscal year, real yields fell on lower nominal treasury yields. Short-term real yields6 fell more than long-term yields in conjunction with the Fed decision to cut the Federal funds rate. 1-year real yields fell 132 bps, while the 5-, 10-, and 30-year real yields were lower by 128 bps, 97 bps, and 77 bps, respectively7.

 

Highest inflation in 30 years along with falling real interest rates during the fiscal year led to positive total return performance for both the Fund and the Underlying Index. For the 12-month period, the NAV performance of the Fund underperformed the Bloomberg U.S. TIPS 1-10 Year Index8 by -30 bps due to higher duration positioning of the Underlying Index against the backdrop of falling real interest rates. Tracking difference between the Fund’s NAV and the Underlying Index for the 12-month period was -17 bps, reflective of the Fund’s management fee (-18 bps), duration and curve positioning (-4 bps), security selection (+3 bps), trading and pricing differences (+8 bps), and other factors (-6 bps).

 

* 

The return shown is based on net asset value calculated for shareholder transactions and may differ from the return shown in the financial highlights, which reflects adjustments made to the net asset value in accordance with accounting principles generally accepted in the United States of America. The net asset value was $28.02 as of October 31, 2021.

 

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 

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

 

4 

U.S. Bureau of Labor Statistics, Consumer Price Index, October 31, 2021 and October 31, 2020, respectively.

 

5 

U.S. Bureau of Labor Statistics, Consumer Price Index, June 30, 2021.

 

6 

A real yield is the yield to the investor that has been adjusted to remove the effects of inflation.

 

 

7 

Bloomberg, In this analysis we are making a comparison between the difference in the real yield rates of the 1-year, 5-year, 10-year and 30-year maturities using data available as of January 1, 2021 and October 31, 2021.

 

8 

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

 

   FLEXSHARES ANNUAL REPORT     45  


Table of Contents

 

FlexShares®   MANAGEMENT’S DISCUSSION OF FUND PERFORMANCE

Disciplined Duration MBS Index Fund Ticker:  MBSD

 

 

CUMULATIVE PERFORMANCE

Through October 31, 2021

 

LOGO

 

AVERAGE ANNUAL TOTAL RETURN

For the period ended October 31, 2021

 

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

 

 

 

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

    -0.28     4.04     1.97     2.14

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

    -0.11     4.01     2.01     2.17

ICE BofA Merrill Lynch® Constrained Duration US Mortgage Backed Securities IndexSM

    0.73     4.55     2.52     2.61

 

All data as of 10/31/21. 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, 2022. 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 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 reflects 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 average effective duration,1 of the portfolio of MBS represented in the Underlying Index was between 3.25 and 4.25 years. As of October 31, 2021, there were 109 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.

 

During the first half of the fiscal year ended October 31, 2021, fixed income investments moved higher as news about the COVID-19 (“COVID”) vaccine advancements were viewed by investors as a catalyst for a potential economic recovery. Quarterly Gross Domestic Product (GDP) as reported by the U.S. Bureau of Economic Analysis rebounded to 4.5% in the fourth quarter of 2020 followed by 6.3% and 6.7% in the first and second quarters of 2021. Emergence of the Delta variant of the COVID virus led to the reimposition of restrictions resulting in a slowdown of GDP to only 2.0% during the calendar third quarter of 2021.

 

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.

 

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FlexShares®   MANAGEMENT’S DISCUSSION OF FUND PERFORMANCE

Disciplined Duration MBS Index Fund (cont.)

 

 

PORTFOLIO ANALYSIS (cont.)

 

The U.S. yield curve2 steepened in early calendar year 2021 as prospects for economic reopening with the pending distribution of COVID vaccines and the runoff elections for two senate seats in Georgia. Investors began to consider the positive impact on markets of the potential for additional fiscal stimulus with one party in control of the House, Senate and Executive Branch.

 

Short-term Treasury yields remained at low levels despite the Federal Reserve (Fed) statements indicating the possibility of decreasing the purchases of Treasury and Agency MBS and the highest consumer price inflation in thirteen years. By the summer of 2021, yields were lower as increased infections from the COVID Delta variant weighed on economic growth outlooks.

 

By fiscal year-end, 1-month and 3-month Treasury yields were down a couple of basis points (bps)3, 1-year Treasury yields were unchanged, while intermediate- and long-term yields were higher with 2-year yields up +34 bps, 5-year yields up +80 bps, 10-year yields up +68 bps, 30-year yields up +27 bps.

 

Prompted by lower interest rates, refinancing activity, housing sales and mortgage applications began to surge

April 2020, as average 30-year mortgage rates (Freddie Mac Index) raised slightly from 2.81% to 3.14% during the fiscal year4. Powered by robust demand and low mortgage rates, existing home sales managed a 16.3% increase5 for the twelve months following September 2020, while new housing starts increased 15.3% for the fiscal year.6

 

Highest inflation in 30 years along with falling real interest rates during the fiscal year led to positive 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. Mortgage Backed Securities Index7 by +30 bps due to the Underlying Index’s exposure to a selection of higher coupon8, more seasoned MBS securities which outperformed newer MBS due in part to less principal prepayment risk. Tracking difference between the Fund’s NAV and the Underlying Index’s total return for the 12-month period was -101 bps, reflective of the Fund’s management fee (-20 bps), trading costs and fees (-8 bps), pricing differences (-83 bps), yield curve positioning (-21 bps), sector allocation (-5 bps), security selection (+37 bps), and other factors (-1 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 

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

 

4 

Source: Bloomberg. Federal Home Loan Mortgage Corp. Primary Mortgage Market Survey. October 31, 2020 through November 1, 2021.

 

5 

Source: Bloomberg. National Association of Realtors, US Existing Homes Sales, September30, 2020 through September 30, 2021.

 

6 

Source: Bloomberg. U.S. Census Bureau, Us New Privately Owned Housing Unites Starts, October 31, 2020 through October 31, 2021.

 

7 

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

 

8 

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.

 

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Table of Contents

 

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

US Corporate Bond Index Fund Ticker:   SKOR

 

 

CUMULATIVE PERFORMANCE

Through October 31, 2021

 

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, 2021

 

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

 

 

 

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

    0.70     6.42     3.76     3.75

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

    0.68     6.39     3.73     3.75

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

    1.34     6.97     4.25     4.19

Bloomberg U.S. Intermediate Corporate Bond Index

    0.71     5.80     3.65     3.62

 

All data as of 10/31/21. 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, 2022. 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 reflects the performance of a broad universe of US-dollar denominated investment grade corporate bonds that can potentially deliver a higher total return than the overall investment grade corporate bond market, as represented by the Northern Trust US Investment-Grade 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 calculate optimal weights for securities in the Underlying Index based on liquidity and security issuers’ fundamental factors, as determined by Northern Trust Investments, Inc. (“NTI”), in its capacity as index provider (the “Index Provider”). As of October 31, 2021, there were 2,512 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 first half of the fiscal year ended October 31, 2021, fixed income investments moved higher as news about the COVID-19 (“COVID”) vaccine advancements were viewed by investors as a catalyst for a potential economic recovery. Quarterly Gross Domestic Product (GDP) as reported by the U.S. Bureau of Economic Analysis rebounded to 4.5% in the fourth quarter of 2020 followed by 6.3% and 6.7% in the first and second quarters of 2021. Emergence of the Delta variant of the COVID virus led to the reimposition of restrictions resulting in a slowdown of GDP to only 2.0% during the calendar third quarter of 2021.

 

1 

The Northern Trust US Investment Grade Corporate Bond IndexSM is a market-capitalization weighted index comprised of U.S. dollar-denominated investment grade corporate bonds.

 

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Table of Contents

 

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

US Corporate Bond Index Fund (cont.)

 

 

PORTFOLIO ANALYSIS (cont.)

 

The U.S. yield curve2 steepened in early calendar year 2021 as prospects for economic reopening with the pending distribution of COVID vaccines and the runoff elections for two senate seats in Georgia. Investors began to consider the positive impact on markets of the potential for additional fiscal stimulus with one party in control of the House, Senate and Executive Branch.

 

Short-term Treasury yields remained at low levels despite the Federal Reserve (Fed) statements indicating the possibility of decreasing the purchases of Treasury and Agency Mortgage Backed Securities (MBS) and the highest consumer price inflation in thirteen years. By the summer of 2021, yields were lower as increased infections from the COVID Delta variant weighed on economic growth outlooks.

 

By fiscal year-end, 1-month and 3-month Treasury yields were down a couple of basis points (bps)3, 1-year Treasury yields were unchanged, while intermediate- and long-term yields were higher with 2-year yields up

+34 bps, 5-year yields up +80 bps, 10-year yields up +68 bps, 30-year yields up +27 bps.

 

We believe that investor expectations for rebounding corporate revenues and earnings along with investor pursuit of higher yields led to increased demand for

U.S. corporate credit securities. Intermediate-term4 credit spreads5 trended lower through February 2021, then widened briefly in March 2021 before once again trending lower into the fiscal year. Further robust economic recovery and consumer/business spending helped drive average Intermediate-term option adjusted spreads (“OAS”)6 to 63 bps in comparison to comparable maturing Treasury securities by fiscal year from 94 bps at the beginning of the fiscal year7.

 

During the fiscal year, the Fund’s NAV underperformed the Bloomberg U.S. Intermediate Corporate Bond Index8 by -5 bps due in part to the Fund’s management fee. During the fiscal year, relative overweight allocations to fixed income securities in financials, real estate investment trusts (“REIT”) and utilities sectors along with security selection in the banking and utility sectors added to Fund performance while a relative underweighting to the communications sector and security selection in the industrials sector detracted from performance. The tracking difference between the Fund’s NAV and the Underlying Index’s return for the fiscal year was -64 bps, which is reflective of the Fund’s management fee (-22 bps), trading costs and fees (-14 bps), pricing differences (+1 bps), sector and security selection (-31 bps), yield curve positioning (+1 bps), and other factors (+1 bp).

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 

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

 

4 

Intermediate-term bonds typically mature between 3 – 10 years.

 

5 

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

 

6

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.

 

7 

Source: Bloomberg, in this analysis we are making a comparison between the difference of the Option Adjusted Spread of intermediate-term investment grade corporate bonds using data available on the Bloomberg U.S. Intermediate Corporate Bond Index of October 31, 2020 – October 31, 2021.

 

8 

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

 

   FLEXSHARES ANNUAL REPORT     49  


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, 2021

 

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, 2021

 

    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)

    5.14     13.35     7.36     8.02

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

    5.23     13.45     7.00     8.00

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

    5.86     14.28     8.14     8.73

Bloomberg Long U.S. Corporate Bond Index

    4.55     12.49     7.07     7.89

 

All data as of 10/31/21. 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, 2022. 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 reflects the performance of a broad universe of US-dollar denominated investment grade corporate bonds that can potentially deliver a higher total return than the overall investment grade corporate bond market, as represented by the Northern Trust US Long 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 calculate optimal weights for securities in the Underlying Index based on liquidity and security issuers’ fundamental factors, as determined by Northern Trust Investments, Inc. (“NTI”), in its capacity as index provider (the “Index Provider”). As of October 31, 2021, there were 1,342 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 first half of the fiscal year ended October 31, 2021, fixed income investments moved higher as news about the COVID-19 (“COVID”) vaccine advancements were viewed by investors as a catalyst for a potential economic recovery. Quarterly Gross Domestic Product (GDP) as reported by the U.S. Bureau of Economic Analysis rebounded to 4.5% in the fourth quarter of 2020 followed by 6.3% and 6.7% in the first and second quarters of 2021. Emergence of the Delta variant of the COVID virus led to the reimposition of restrictions resulting in a slowdown of GDP to only 2.0% during the calendar third quarter of 2021.

 

1 

The Northern Trust US Long Corporate Bond IndexSM is a market capitalization weighted index comprised of long-term, U.S. dollar- denominated investment grade corporate bonds.

 

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Table of Contents

 

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

US Long Corporate Bond Index Fund (cont.)

 

 

PORTFOLIO ANALYSIS (cont.)

 

The U.S. yield curve2 steepened in early calendar year 2021 as prospects for economic reopening with the pending distribution of COVID vaccines and the runoff elections for two senate seats in Georgia. Investors began to consider the positive impact on markets of the potential for additional fiscal stimulus with one party in control of the House, Senate and Executive Branch.

 

Short-term Treasury yields remained at low levels despite the Federal Reserve (Fed) statements indicating the possibility of decreasing the purchases of Treasury and Agency Mortgage Backed Securities (MBS) and the highest consumer price inflation in thirteen years. By the summer of 2021, yields were lower as increased infections from the COVID Delta variant weighed on economic growth outlooks.

 

By fiscal year-end, 1-month and 3-month Treasury yields were down a couple of basis points (bps)3, 1-year Treasury yields were unchanged, while intermediate- and long-term yields were higher with 2-year yields up +34 bps, 5-year yields up +80 bps, 10-year yields up +68 bps, 30-year yields up +27 bps.

 

We believe that investor expectations for rebounding corporate revenues and earnings along with investor

pursuit of higher yields led to increased demand for U.S. corporate credit securities. Long-term4 credit spreads5 trended lower through February 2021, then widened briefly in March 2021 before once again trending lower into the fiscal year. Further robust economic recovery and consumer/business spending helped drive average Intermediate-term option adjusted spreads (“OAS”)6 to 63 bps in comparison to comparable maturing Treasury securities by fiscal year from 94 bps at the beginning of the fiscal year7.

 

During the fiscal year, the Fund’s NAV underperformed the Bloomberg Long U.S. Corporate Bond Index8 by +59 bps. During the fiscal year, positive performance from relative sector overweight allocations to fixed income securities in energy, financials and materials sectors added to Fund performance while a relative underweighting to the communications, consumer staples and industrial sectors detracted from performance. The tracking difference between the Fund’s NAV and the combined Underlying Indexes return for the period was -72 bps, which is reflective of the Fund’s management fee (-22 bps), trading costs and fees (-36 bps), pricing differences (-5 bps), sector and security selection (-17 bps), yield curve positioning (+9 bps), and other factors (-1 bp).

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

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

 

4 

Long-term bonds typically mature beyond 10 years.

 

5 

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

 

6 

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.

 

7 

Source: Bloomberg, in this analysis we are making a comparison between the difference of the Option Adjusted Spread of intermediate-term investment grade corporate bonds using data available on the Bloomberg U.S. Intermediate Corporate Bond Index as of October 31, 2020 – October 31, 2021.

 

8 

Bloomberg Long U.S. Corporate Bond Index measures the performance of investment grade U.S. corporate bond market with bonds that have a maturity of more than ten years.

 

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Table of Contents

 

FlexShares® High Yield   MANAGEMENT’S DISCUSSION OF FUND PERFORMANCE

Value-Scored Bond Index Fund Ticker:  HYGV

 

 

CUMULATIVE PERFORMANCE

Through October 31, 2021

 

LOGO

 

AVERAGE ANNUAL TOTAL RETURN

For the period ended October 31, 2021

 

    1 Year     3 Year     Fund
Inception
7/17/2018
 
 

 

 

 

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

    13.38     7.88     7.22

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

    13.20     7.91     7.23

Northern Trust High Yield Value-Scored US Corporate Bond IndexSM

    14.14     9.33     8.59

ICE BofA Merrill Lynch® US High Yield Index

    10.74     7.15     6.56

 

All data as of 10/31/21. 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, 2022. 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 reflects the performance of a broad universe of US-dollar denominated high yield corporate bonds that seeks a higher total return than the overall high yield corporate bond market, as represented by the Northern Trust High Yield US Corporate Bond IndexSM (the “Parent Index”).1 The securities included in the Underlying Index are a subset of the securities included in the Parent Index. 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 score, as determined by Northern Trust Investments, Inc. (“NTI”), acting in its capacity as index provider (“Index Provider”). As of October 31, 2021, there were 970 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 first half of the fiscal year ended October 31, 2021, fixed income investments moved higher as news about the COVID-19 (“COVID”) vaccine advancements were viewed by investors as a catalyst for a potential economic recovery. Quarterly Gross Domestic Product (GDP) as reported by the U.S. Bureau of Economic Analysis rebounded to 4.5% in the fourth quarter of 2020 followed by 6.3% and 6.7% in the first and second quarters of 2021. Emergence of the Delta variant of the COVID virus led to the

 

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.

 

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FlexShares® High Yield   MANAGEMENT’S DISCUSSION OF FUND PERFORMANCE

Value-Scored Bond Index Fund (cont.)

 

 

PORTFOLIO ANALYSIS (cont.)

 

reimposition of restrictions resulting in a slowdown of GDP to only 2.0% during the calendar third quarter of 2021.

 

The U.S. yield curve2 steepened in early calendar year 2021 as prospects for economic reopening with the pending distribution of COVID vaccines and the runoff elections for two senate seats in Georgia. Investors began to consider the positive impact on markets of the potential for additional fiscal stimulus with one party in control of the House, Senate and Executive Branch.

 

Short-term Treasury yields remained at low levels despite the Federal Reserve (Fed) statements indicating the possibility of decreasing the purchases of Treasury and Agency Mortgage Backed Securities (MBS) and the highest consumer price inflation in thirteen years. By the summer of 2021, yields were lower as increased infections from the COVID Delta variant weighed on economic growth outlooks.

 

By fiscal year-end, 1-month and 3-month Treasury yields were down a couple of basis points (bps)3, 1-year Treasury yields were unchanged, while intermediate- and long-term yields were higher with 2-year yields up +34 bps, 5-year yields up +80 bps, 10-year yields up +68 bps, 30-year yields up +27 bps.

 

High Yield4 credit spreads5 from the beginning of the fiscal year with a temporary retreat wider in during July and August when reinstitution of some economic shutdowns due to the COVID Delta variant raised investors’ uncertainty for corporate revenues and earnings. High Yield option adjusted spreads (“OAS”)6 of

the ICE BofA US High Yield Index7 declined from 532 bps to 302 bps in early July 2021, then widened to 321 bps at the end of August 2021 and ended the fiscal year at 315 bps8. We believe the decline in credit spreads was linked to investors continuing search for income, robust economic growth supported by fiscal and monetary policy and lower credit defaults. The Moody’s Investor Services’ annual high yield default rate measure fell from 8.3% in October 2020 to 2.6% as of October 2021. Our analysis, based on increasing issuance of new supply, suggests that High Yield investments have benefitted from the post-COVID recovery and access to capital markets as the year-to-date through October 2021 total gross new issuance of U.S. high yield bonds totaled $462 billion, versus the then record of $450 billion issued in 2020 and the $399 billion issued in 20139.

 

For the 2021 fiscal year, the Fund’s NAV outperformed the ICE BofA Merrill Lynch US High Yield Index by +264 bps. Performance was driven primarily by security selection and sector allocations as the Fund’s quantitative strategy of identifying better value securities resulted in overweights to and better security selection in lower quality credits which, on average, outperformed higher quality credits during the fiscal year. The tracking difference between the Fund’s NAV and the Underlying Index’s total return for the period was -76 bps, which is reflective of the Fund’s management fee (-37 bps), trading costs and fees (-37 bps), pricing differences (-10 bps), yield curve positioning (-1 bps), sector allocation (-7 bps), security selection (+18 bps) and other factors (-2 bp).

 

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 

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

 

4 

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.

 

5 

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

 

6 

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.

 

 

7 

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.

 

8 

Source: Bloomberg, in this analysis we are making a comparison between the difference of the Option Adjusted Spread of long-term High Yield corporate bonds using data available on the ICE BofA US High Yield Index as of October 31, 2020 – October 31, 2021.

 

9 

Source: JP Morgan, 2022 High Yield Bond and Leverage Loan Supply Outlook, November 12, 2021.

 

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Table of Contents

 

FlexShares®   MANAGEMENT’S DISCUSSION OF FUND PERFORMANCE

Ready Access Variable Income Fund Ticker:  RAVI

 

 

CUMULATIVE PERFORMANCE

Through October 31, 2021

 

LOGO

 

AVERAGE ANNUAL TOTAL RETURN

For the period ended October 31, 2021

 

    1 Year     3 Year     5 Year     Fund
Inception
10/9/2012
 
 

 

 

 

FlexShares Ready Access Variable Income Fund
(Based on Net Asset Value)

    0.34     1.90     1.74     1.32

FlexShares Ready Access Variable Income Fund
(Based on Market Price)

    0.35     1.89     1.73     1.32

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

    0.05     1.05     1.09     0.64

 

All data as of 10/31/21. 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, 2022. 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 attempts to achieve its investment objective by investing under normal circumstances at least 80% of its total assets in a non-diversified 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 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.

 

During the first half of the fiscal year ended October 31, 2021, fixed income investments moved higher as news about the COVID-19 (“COVID”) vaccine advancements were viewed by investors as a catalyst for a potential economic recovery. Quarterly Gross Domestic Product (GDP) as reported by the U.S. Bureau of Economic Analysis rebounded to 4.5% in the fourth quarter of 2020 followed by 6.3% and 6.7% in the first and second quarters of 2021. Emergence of the Delta variant of the COVID virus led to the reimposition of restrictions resulting in a slowdown of GDP to only 2.0% during the calendar third quarter of 2021.

 

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.

 

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FlexShares®   MANAGEMENT’S DISCUSSION OF FUND PERFORMANCE

Ready Access Variable Income Fund (cont.)

 

 

PORTFOLIO ANALYSIS (cont.)

 

The U.S. yield curve2 steepened in early calendar year 2021 as prospects for economic reopening with the pending distribution of COVID vaccines and the runoff elections for two senate seats in Georgia. Investors began to consider the positive impact on markets of the potential for additional fiscal stimulus with one party in control of the House, Senate and Executive Branch.

 

Short-term Treasury yields remained at low levels despite the Federal Reserve (Fed) statements indicating the possibility of decreasing the purchases of Treasury and Agency Mortgage Backed Securities (MBS) and the highest consumer price inflation in thirteen years. By the summer of 2021, yields were lower as increased infections from the COVID Delta variant weighed on economic growth outlooks.

 

By fiscal year-end, 1-month and 3-month Treasury yields were down a couple of basis points (bps)3, 1-year Treasury yields were unchanged, while intermediate- and long-term yields were higher with 2-year yields up +34 bps, 5-year yields up +80 bps, 10-year yields up +68 bps, 30-year yields up +27 bps.4

Short-term credit option adjusted spreads (“OAS”)5 were lower for the fiscal year. OAS for the Bloomberg U.S. Treasury Floating Rate Bond Index6 fell -14 bps and the OAS on the Bloomberg 0-3 Year Corporate Index7 was -6 bps lower. Treasury Bill (T-Bill) yields remained near zero for the fiscal year as 1-month and 3-month T-Bills averaged yields of only 0.04%, while 6-month T-Bills averaged yields of 0.05% for the fiscal year8. Our contention is that investor demand for yield likely drove the tightening of corporate credit OAS as investors sought higher yields for current income.

 

For the 2021 fiscal year, the Fund’s NAV outperformed its market benchmark, the Bloomberg 1-3 Month U.S. Treasury Bill Index, by +29 bps. With short-term Treasury yields remaining historically low, the Fund’s portfolio was weighted towards corporate and asset-backed securities versus Treasuries. Higher average yield from lengthening the fund’s overall duration, the above-mentioned sector allocations and overall security selection drove outperformance. The Fund’s average effective duration, however, detracted from performance due to the increasing of the Treasury yield curve.

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 

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

 

4 

Bloomberg, In this analysis we are making a comparison between the difference in the yield rates of the 1-month, 3-month, 1-year, 2-year, 5-year, 10-year and 30-year maturities using data available as of October 31, 2020 and October 31, 2021.

 

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 risk-free rate) and that spread is added to the fixed-income security for comparison purposes.

 

6 

The Bloomberg U.S. Treasury Floating Rate Bond Index (BUSYFL) is a rules-based, market value-weighted index engineered to measure the performance of floating rate U.S. Treasury bonds.

 

7 

The Bloomberg Barclays U.S. 0-3 Year Corporate Bond Index contains fixed-rate, investment-grade US Dollar-denominated bonds from industrial, utility and financial issuers only that have a maturity of less than three years.

 

8 

Source: Bloomberg, In this analysis we are making a comparison between the difference in the OAS of the Bloomberg U.S. Treasury Floating Rate Bond Index, Bloomberg 0-3 Year Corporate Index, 1-month T-bills, 3-month T-bills maturities using data available as of October 31, 2020 and October 31, 2021.

 

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Table of Contents

 

FlexShares®   MANAGEMENT’S DISCUSSION OF FUND PERFORMANCE

Core Select Bond Fund Ticker:  BNDC

 

 

CUMULATIVE PERFORMANCE

Through October 31, 2021

 

LOGO

 

AVERAGE ANNUAL TOTAL RETURN

For the period ended October 31, 2021

 

    1 Year     3 Year     Fund
Inception
11/18/2016
 
 

 

 

 

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

    0.26     6.01     3.61

FlexShares Core Select Bond Fund (Based on Market Price)

    0.30     5.99     3.63

Bloomberg U.S. Aggregate Bond Index

    -0.48     5.63     3.62

 

All data as of 10/31/21. 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, 2022. In the absence of such reimbursements, performance would be reduced. The gross expense ratio of the Fund is 0.58% 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 that is designed to achieve optimal potential for total return after considering various sources of investment risk. The Fund 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 curve2 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.

 

During the first half of the fiscal year ended October 31, 2021, fixed income investments moved higher as news about the COVID-19 (“COVID”) vaccine advancements were viewed by investors as a catalyst for a potential economic recovery. Quarterly Gross Domestic Product (GDP) as reported by the U.S. Bureau of Economic Analysis rebounded

 

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.

 

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Table of Contents

 

FlexShares®   MANAGEMENT’S DISCUSSION OF FUND PERFORMANCE

Core Select Bond Fund (cont.)

 

 

PORTFOLIO ANALYSIS (cont.)

 

to 4.5% in the fourth quarter of 2020 followed by 6.3% and 6.7% in the first and second quarters of 2021. Emergence of the Delta variant of the COVID virus led to the reimposition of restrictions resulting in a slowdown of GDP to only 2.0% during the calendar third quarter of 2021.

 

The U.S. yield curve steepened in early calendar year 2021 as prospects for economic reopening with the pending distribution of COVID vaccines and the runoff elections for two senate seats in Georgia. Investors began to consider the positive impact on markets of the potential for additional fiscal stimulus with one party in control of the House, Senate and Executive Branch.

 

Short-term Treasury yields remained at low levels despite the Federal Reserve (Fed) statements indicating the possibility of decreasing the purchases of Treasury and Agency Mortgage Backed Securities (MBS) and the highest consumer price inflation in thirteen years. By the summer of 2021, yields were lower as increased infections from the COVID Delta variant weighed on economic growth outlooks.

 

By fiscal year-end, 1-month and 3-month Treasury yields were down a couple of basis points (bps)3, 1-year Treasury yields were unchanged, while intermediate- and long-term yields were higher with 2-year yields up +34 bps, 5-year yields up +80 bps, 10-year yields up +68 bps, 30-year yields up +27 bps.4

 

Prompted by lower interest rates, refinancing activity, housing sales and mortgage applications began to surge April 2020, as average 30-year mortgage rates (Freddie Mac Index) raised slightly from 2.81% to 3.14% during the fiscal year5. Powered by robust demand and low mortgage rates, existing home sales managed a 16.3% increase for the twelve months following September

20206, while new housing starts increased 15.3% for the fiscal year7.

 

We believe that investor expectations for rebounding corporate revenues and earnings along with investor pursuit of higher yields led to increased demand for U.S. corporate credit securities. Intermediate-term8 credit spreads trended lower through February 2021, then widened briefly in March 2021 before once again trending lower into the fiscal year. Further robust economic recovery and consumer/business spending helped drive average Intermediate-term option adjusted spreads (“OAS”)9 to 63 bps in comparison to comparable maturing Treasury securities by fiscal year from 94 bps at the beginning of the fiscal year.10

 

At the beginning of the fiscal year, the Fund, in comparison to the Bloomberg U.S. Aggregate Bond Index, was generally positioned with an underweight to U.S. Treasuries, a slight overweight to mortgage backed securities (MBS) and an overweight to corporate fixed income on our expectations for positive economic growth and corporate earnings during the ongoing COVID reopening which was being fueled by fiscal and monetary support and the potential positive impacts of soon to be available COVID vaccines. During the first quarter of the fiscal year, the slight overweight to MBS was reduced to a slight underweight due to what we believed was the investment risk related to increased prepayments and interest rate volatility and we invested in U.S. Treasuries. Over the balance of the fiscal year, due to interest rate volatility and the on-going economic recovery as COVID vaccines boosted consumer and business spending, the overweight to corporate securities was steadily increased and we decreased exposures to both MBS and Treasuries. Duration11 positioning was generally slightly longer versus the Bloomberg U.S. Aggregate Bond

 

3 

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

 

4 

Bloomberg, In this analysis we are making a comparison between the difference in the yield rates of the 1-month, 3-month, 1-year, 2-year, 5-year, 10-year and 30-year maturities using data available as of October 31, 2020 and October 31, 2021.

 

5 

Source: Bloomberg. Federal Home Loan Mortgage Corp. Primary Mortgage Market Survey. October 31, 2020 through November 1, 2021.

 

6 

Source: Bloomberg. National Association of Realtors, US Existing Homes Sales, September 30, 2020 through September 30, 2021.

 

7 

Source: Bloomberg. U.S. Census Bureau, US New Privately Owned Housing Units Started, October 31, 2020 through October 31, 2021.

8 

Intermediate-term bonds typically mature between 3 – 10 years.

 

9 

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.

 

10 

Source: Bloomberg, in this analysis we are making a comparison between the difference of the Option Adjusted Spread of intermediate-term investment grade corporate bonds using data available on the Bloomberg U.S. Intermediate Corporate Bond Index as of October 31, 2020 – October 31, 2021.

 

11 

Duration is how sensitive a fixed income investment is to a change in interest rates and is expressed as a number of years – the higher the number the more volatile would be the expected change.

 

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Table of Contents

 

FlexShares®   MANAGEMENT’S DISCUSSION OF FUND PERFORMANCE

Core Select Bond Fund (cont.)

 

 

 

 

 

 

PORTFOLIO ANALYSIS (cont.)

 

Index12 during the fiscal year, providing a positive contribution to overall Fund performance. The difference in the credit spread between various U.S. investment grade-corporate credit narrowed substantially during the fiscal year which also contributed to the Fund’s positive relative performance. The steepening of the Treasury yield curve had a negative impact on the Fund’s returns.

 

For the 2021 fiscal year, the Fund’s NAV outperformed its market benchmark, the Bloomberg U.S. Aggregate Bond Index, by +74 bps. While the slightly longer overall duration of the fund detracted from performance due to steepening of the Treasury yield curve, portfolio manager security selection and an overweight to long-term corporate credits along with an underweight to MBS and Treasuries all contributed to excess returns versus the Fund’s market benchmark.

12 

The Bloomberg Barclays Aggregate Bond Index broadly tracks the U.S. investment-grade bond market.

 

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Table of Contents

 

FlexShares® Trust

Statements of Assets and Liabilities October 31, 2021

 

 

     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

   $ 129,983,210      $ 67,222,791      $ 14,649,196      $ 931,783,626  

Affiliate securities, at cost

                          556,713  

Securities Lending Reinvestments, at cost

                          156,227,116  
  

 

 

 

Securities, at value†

     160,818,791        74,810,927        15,685,907        1,713,847,642  

Affiliate securities, at value

                          902,375  

Securities Lending Reinvestments, at value

                          156,227,160  

Cash

     193,668        93,526        14,790        11,148,150  

Cash segregated at broker*

            57,385        27,161        333,884  

Foreign cash††

            73,520        154,891         

Restricted cash**

                           

Due from Authorized Participant

                           

Unrealized appreciation on forward foreign currency contracts

            14,802        2         

Receivables:

           

Dividends and interest

     97,556        359,374        8,994        834,924  

Securities lending income

            467               24,254  

Capital shares issued

                           

Investment adviser

     15        19        4,008        699  

Securities sold

            62,698        1,609         

Variation margin on futures contracts

     8,541        4,500               447,358  
  

 

 

 

Total Assets

     161,118,571        75,477,218        15,897,362        1,883,766,446  
  

 

 

 

LIABILITIES

 

Cash overdraft

                           

Unrealized depreciation on forward foreign currency contracts

            9,585                

Due to brokers

     8,058                       

Payables:

           

Cash collateral received from securities loaned

                          156,227,373  

Deferred compensation (Note 7)

     5,307        3,155        548        146,844  

Investment advisory fees (Note 4)

     28,469        21,359        5,377        357,576  

Trustee fees (Note 7)

     845        464        88        9,427  

Securities purchased

                           

Deferred non-US capital gains taxes

                   45,878         

Due to Authorized Participant

            62,698                

Variation margin on futures contracts

                   1,780         

Capital shares redeemed

                          1,708  

Other

     1,400        9,000               4,500  
  

 

 

 

Total Liabilities

     44,079        106,261        53,671        156,747,428  
  

 

 

 

Net Assets

   $ 161,074,492      $ 75,370,957      $ 15,843,691      $ 1,727,019,018  
  

 

 

 

NET ASSETS CONSIST OF:

 

Paid-in capital

   $ 130,969,714      $ 67,935,051      $ 15,170,847      $ 958,017,061  

Distributable earnings (loss)

     30,104,778        7,435,906        672,844        769,001,957  
  

 

 

 

Net Assets

   $ 161,074,492      $ 75,370,957      $ 15,843,691      $ 1,727,019,018  
  

 

 

 

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

     2,950,001        2,700,001        600,001        9,650,001  

Net Asset Value

   $ 54.60      $ 27.92      $ 26.41      $ 178.97  

† Securities on loan, at value

   $      $      $      $ 202,123,212  

†† Cost of foreign cash

   $      $ 73,033      $ 156,154      $  

 

*

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

 

**

Includes cash pledged by an Authorized Participant for missing deposit securities required to secure Creation Units.

 

See Accompanying Notes to the Financial Statements.

 

   FLEXSHARES ANNUAL REPORT     59  


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

   $ 501,167,692      $ 273,639,114      $ 111,180,900      $ 149,948,638  

Affiliate securities, at cost

                           

Securities Lending Reinvestments, at cost

     13,300,695        2,781,579        109,616         
  

 

 

 

Securities, at value†

     635,693,157        332,495,145        142,459,103        190,347,988  

Affiliate securities, at value

                           

Securities Lending Reinvestments, at value

     13,300,695        2,781,579        109,616         

Cash

     3,780,766        855,389        1,706,610        954,991  

Cash segregated at broker*

     1,404,389        198,374        196,726        156,710  

Foreign cash††

     3,447,840        1,540,099                

Restricted cash**

                           

Due from Authorized Participant

                           

Unrealized appreciation on forward foreign currency contracts

     59,353        12,559                

Receivables:

           

Dividends and interest

     4,184,780        390,387        112,370        202,607  

Securities lending income

     35,297        15,388        558        98  

Capital shares issued

                           

Investment adviser

            36               82  

Securities sold

     456,534        112,851                

Variation margin on futures contracts

     104,221               46,837        39,500  
  

 

 

 

Total Assets

     662,467,032        338,401,807        144,631,820        191,701,976  
  

 

 

 

LIABILITIES

 

Cash overdraft

                           

Unrealized depreciation on forward foreign currency contracts

     182,098        3,323                

Due to brokers

                           

Payables:

           

Cash collateral received from securities loaned

     13,300,695        2,781,579        109,616         

Deferred compensation (Note 7)

     86,420        43,252        5,466        6,573  

Investment advisory fees (Note 4)

     220,932        168,076        38,281        50,258  

Trustee fees (Note 7)

     3,689        1,851        708        1,000  

Securities purchased

            192                

Deferred non-US capital gains taxes

            929,952                

Due to Authorized Participant

     7,705                       

Variation margin on futures contracts

            51,587                

Capital shares redeemed

                           

Other

     27,000        50,000        2,500        1,400  
  

 

 

 

Total Liabilities

     13,828,539        4,029,812        156,571        59,231  
  

 

 

 

Net Assets

   $ 648,638,493      $ 334,371,995      $ 144,475,249      $ 191,642,745  
  

 

 

 

NET ASSETS CONSIST OF:

 

Paid-in capital

   $ 623,021,119      $ 330,576,703      $ 115,286,841      $ 153,299,069  

Distributable earnings (loss)

     25,617,374        3,795,292        29,188,408        38,343,676  
  

 

 

 

Net Assets

   $ 648,638,493      $ 334,371,995      $ 144,475,249      $ 191,642,745  
  

 

 

 

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

     8,800,001        5,500,001        2,875,001        1,700,001  

Net Asset Value

   $ 73.71      $ 60.79      $ 50.25      $ 112.73  

† Securities on loan, at value

   $ 66,431,697      $ 11,156,681      $ 3,078,424      $ 1,207,643  

†† Cost of foreign cash

   $ 3,429,679      $ 1,547,215      $      $  

 

*

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

 

**

Includes cash pledged by an Authorized Participant for missing deposit securities required to secure Creation Units.

 

See Accompanying Notes to the Financial Statements.

 

60    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®
Morningstar Global
Upstream Natural
Resources Index
Fund
 

ASSETS

 

Securities, at cost

   $ 130,424,244      $ 2,481,514      $ 5,003,305      $ 4,901,271,932  

Affiliate securities, at cost

                           

Securities Lending Reinvestments, at cost

     1,234,053                      60,798,497  
  

 

 

 

Securities, at value†

     181,693,556        2,647,456        5,108,626        6,019,017,379  

Affiliate securities, at value

                           

Securities Lending Reinvestments, at value

     1,234,053                      60,798,546  

Cash

     987,683        20,094        3,644        26,387,049  

Cash segregated at broker*

     381,475                      3,059,528  

Foreign cash††

     2,309,088               7,799        5,517,883  

Restricted cash**

                          474,734  

Due from Authorized Participant

                          27,303,600  

Unrealized appreciation on forward foreign currency contracts

     27,020               510        1,209,027  

Receivables:

           

Dividends and interest

     318,302        1,873        11,322        4,115,273  

Securities lending income

     1,127                      35,362  

Capital shares issued

                          19,332,095  

Investment adviser

            2        4         

Securities sold

     46,567               4,794         

Variation margin on futures contracts

     55,187        1,240               768,666  
  

 

 

 

Total Assets

     187,054,058        2,670,665        5,136,699        6,168,019,142  
  

 

 

 

LIABILITIES

 

Cash overdraft

                           

Unrealized depreciation on forward foreign currency contracts

     16,181               1,857        814,670  

Due to brokers

            978                

Payables:

           

Cash collateral received from securities loaned

     1,234,053                      60,798,887  

Deferred compensation (Note 7)

     7,999                      512,673  

Investment advisory fees (Note 4)

     64,364        196        513        2,360,112  

Trustee fees (Note 7)

     987        5        10        30,794  

Securities purchased

                   15,259        49,738,533  

Deferred non-US capital gains taxes

                          537,973  

Due to Authorized Participant

                          474,734  

Variation margin on futures contracts

                           

Capital shares redeemed

                           

Other

     13,000                      40,500  
  

 

 

 

Total Liabilities

     1,336,584        1,179        17,639        115,308,876  
  

 

 

 

Net Assets

   $ 185,717,474      $ 2,669,486      $ 5,119,060      $ 6,052,710,266  
  

 

 

 

NET ASSETS CONSIST OF:

 

Paid-in capital

   $ 135,740,847      $ 2,500,000      $ 5,000,171      $ 6,011,428,653  

Distributable earnings (loss)

     49,976,627        169,486        118,889        41,281,613  
  

 

 

 

Net Assets

   $ 185,717,474      $ 2,669,486      $ 5,119,060      $ 6,052,710,266  
  

 

 

 

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

     1,250,001        50,000        100,000        156,550,001  

Net Asset Value

   $ 148.57      $ 53.39      $ 51.19      $ 38.66  

† Securities on loan, at value

   $ 6,129,923      $      $      $ 303,788,929  

†† Cost of foreign cash

   $ 2,318,405      $      $ 7,774      $ 5,450,348  

 

*

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

 

**

Includes cash pledged by an Authorized Participant for missing deposit securities required to secure Creation Units.

 

See Accompanying Notes to the Financial Statements.

 

   FLEXSHARES ANNUAL REPORT     61  


Table of Contents

 

 

Statements of Assets and Liabilities (cont.)

 

 

     FlexShares®
STOXX®
Global Broad
Infrastructure
Index Fund
     FlexShares®
Global Quality
Real Estate
Index Fund
     FlexShares®
Real Assets
Allocation
Index Fund
     FlexShares®
Quality
Dividend
Index Fund
 

ASSETS

           

Securities, at cost

   $ 2,273,516,071      $ 341,555,980      $      $ 1,244,426,037  

Affiliate securities, at cost

                   29,129,334         

Securities Lending Reinvestments, at cost

     32,219,867        11,192,491               93,371,909  
  

 

 

 

Securities, at value†

     2,621,193,595        414,269,818               1,632,826,679  

Affiliate securities, at value

                   30,290,663         

Securities Lending Reinvestments, at value

     32,219,867        11,192,491               93,371,945  

Cash

     10,504,965        2,711,966        11,264        7,342,515  

Cash segregated at broker*

     1,784,432        522,784               371,176  

Foreign cash††

     7,322,870        1,672,479                

Restricted cash**

            154,896                

Due from Authorized Participant

                           

Unrealized appreciation on forward foreign currency contracts

     265,525        8,285                

Receivables:

           

Dividends and interest

     5,657,562        565,367               2,348,886  

Securities lending income

     19,179        6,385               9,864  

Capital shares issued

                           

Investment adviser

                   8         

Securities sold

            5,411,213        5,105,345         

Variation margin on futures contracts

     429,765        122,323               329,859  
  

 

 

 

Total Assets

     2,679,397,760        436,638,007        35,407,280        1,736,600,924  
  

 

 

 

LIABILITIES

           

Cash overdraft

                           

Unrealized depreciation on forward foreign currency contracts

     516,358        14,213                

Due to brokers

                           

Payables:

           

Cash collateral received from securities loaned

     32,219,867        11,192,491               93,372,067  

Deferred compensation (Note 7)

     147,528        27,848        716        164,421  

Investment advisory fees (Note 4)

     1,057,867        155,405        3,532        505,944  

Trustee fees (Note 7)

     14,936        2,156        132        9,012  

Securities purchased

     199        6,487,615        5,103,214         

Deferred non-US capital gains taxes

     1,506,939                       

Due to Authorized Participant

            154,896                

Variation margin on futures contracts

                           

Capital shares redeemed

                           

Other

     28,000        6,000               4,600  
  

 

 

 

Total Liabilities

     35,491,694        18,040,624        5,107,594        94,056,044  
  

 

 

 

Net Assets

   $ 2,643,906,066      $ 418,597,383      $ 30,299,686      $ 1,642,544,880  
  

 

 

 

NET ASSETS CONSIST OF:

           

Paid-in capital

   $ 2,418,455,815      $ 369,238,075      $ 29,319,351      $ 1,256,408,503  

Distributable earnings (loss)

     225,450,251        49,359,308        980,335        386,136,377  
  

 

 

 

Net Assets

   $ 2,643,906,066      $ 418,597,383      $ 30,299,686      $ 1,642,544,880  
  

 

 

 

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

     45,800,001        5,950,001        900,001        28,150,001  

Net Asset Value

   $ 57.73      $ 70.35      $ 33.67      $ 58.35  

† Securities on loan, at value

   $ 170,013,630      $ 35,762,241      $      $ 130,499,879  

†† Cost of foreign cash

   $ 7,278,947      $ 1,667,366      $      $  

 

*

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

 

**

Includes cash pledged by an Authorized Participant for missing deposit securities required to secure Creation Units.

 

See Accompanying Notes to the Financial Statements.

 

62    FLEXSHARES ANNUAL REPORT  


Table of Contents

 

 

Statements of Assets and Liabilities (cont.)

 

 

     FlexShares®
Quality
Dividend
Defensive
Index Fund
     FlexShares®
Quality
Dividend
Dynamic
Index Fund
     FlexShares®
International
Quality
Dividend
Index Fund
    FlexShares®
International
Quality Dividend
Defensive Index
Fund
 

ASSETS

          

Securities, at cost

   $ 348,365,863      $ 16,426,689      $ 536,863,658     $ 62,598,237  

Affiliate securities, at cost

                          

Securities Lending Reinvestments, at cost

     23,597,323        275,181        17,256,554       1,625,153  
  

 

 

 

Securities, at value†

     445,185,932        21,704,940        598,831,553       70,227,191  

Affiliate securities, at value

                          

Securities Lending Reinvestments, at value

     23,597,323        275,181        17,256,554       1,625,153  

Cash

     2,093,272        139,128        7,623,826        

Cash segregated at broker*

     263,859        33,413        1,559,620       118,993  

Foreign cash††

                   5,384,173       1,165,489  

Restricted cash**

                          

Due from Authorized Participant

                          

Unrealized appreciation on forward foreign currency contracts

                   161,905       18,838  

Receivables:

          

Dividends and interest

     597,527        31,686        3,035,015       363,423  

Securities lending income

     1,732        114        14,143       4,583  

Capital shares issued

                          

Investment adviser

                          

Securities sold

     13,619        494              1,739  

Variation margin on futures contracts

     99,046        9,470        10,222        
  

 

 

 

Total Assets

     471,852,310        22,194,426        633,877,011       73,525,409  
  

 

 

 

LIABILITIES

          

Cash overdraft