Exchange-traded funds (ETFs) have become a standard tool in institutions’ investment toolkit, according to a study released by Greenwich Associates.
Nearly half (46 per cent) of institutional ETF investors surveyed allocate 10 per cent or more of total assets to ETFs and 47 per cent say they expect to expand their use in the next year.
The study, “ETFs: An Evolving Toolset for US Institutions,” conducted by Greenwich Associates and sponsored by BlackRock, presents the ETF usage trends of institutions, including corporate and public pensions funds, foundations and endowments, asset managers, investment consultants, insurance companies, and Registered Investment Advisors (RIAs).
The report shows that all institutions are increasing their allocations to ETFs, ETFs have become critical long-term investment tools, the most common ETF application is core portfolio exposure and there has been a dramatic increase in adding fixed income ETFs to portfolios.
1. ETF allocations are growing across all types of institutional investors.
Nearly half (46 per cent) of institutional ETF users allocate 10 per cent or more of total assets to ETFs. About 30 per cent of institutional ETF investors report ETF allocations in the 10 per cent to 25 per cent range. RIAs, who are the largest users of ETFs by assets, have the largest ETF allocations with 41 per cent of RIAs investing more than 25 per cent of total assets in ETFs.
All institutional investor types expect to increase their ETF allocations in the coming year. 45 per cent of insurance companies, who currently invest in ETFs, plan to increase their allocations in the one to 10 per cent range. More than 50 per cent of investment consultants expect their clients to boost allocations this year. In comparison, in 2010, the first year of the study, 33 per cent said they would not change their ETF allocations over a three-year period.
2. ETFs have become critical strategic tools held for the long-term, particularly among pension plans.
Some 63 per cent of all survey respondents describe their ETF usage as strategic, up from 58 per cent in 2013. This is remarkably different than in 2010, when approximately 20 per cent of institutional ETF investors said they employed ETFs to implement strategic or long-term investment decisions.
Today, 49 per cent of participants report average holding periods of two years or more, which is a jump from 36 per cent in 2013. Among institutional investor types, 66 per cent of pension plans’ strategic usage is up sharply from 47 per cent in 2013.
While institutions are expanding their strategic usage, at the same time they continue to implement tactical allocations with ETFs. 81 per cent of asset managers list tactical adjustments as one of the most common applications for ETFs.
Daniel Gamba, head of iShares Americas institutional business at BlackRock, says: “We’re seeing the evolution of institutional investors’ usage of ETFs. Many institutions once confined ETFs to only cash equitisation or transitions. Over the last few years, they’ve discovered their usefulness and broadened usage to many other portfolio applications including core portfolio exposure and liquidity and risk management.”
3. Most common ETF application is core portfolio exposure by all types of institutions.
Approximately 80 per cent of participating institutions are employing ETFs as a means of obtaining core portfolio exposures, up from 74 per cent in 2013. This is in stark contrast to 2010 when only 19 per cent of asset managers and 28 per cent of pension plans used ETFs as a core/satellite application.
Core exposure is the most common ETF application by pension plans, RIAs and insurance companies. Regarding the latter, ETFs have been gaining significant traction among insurance companies as an efficient vehicle for surplus asset investment, which is considered a core exposure application. From 2013 to 2014 the share of insurers in the study using ETFs to invest surplus assets nearly doubled, from approximately 30 per cent to almost 60 per cent.
It appears that insurance companies are also becoming more comfortable using ETFs when investing reserve assets. In 2013, only six per cent of participating insurers reported using ETFs to invest reserve assets. That share climbed to more than 25 per cent in 2014.
4. Dramatic increase in use of fixed income ETFs.
One of the drivers of ETF growth over the past few years has occurred with fixed income ETFs. Until recently, most institutions viewed ETFs as equity products. This year, 66 per cent of institutional ETF investors are employing ETFs in domestic fixed income portfolios, up from 55 per cent in 2013.
Over the past 12 months, the share of asset manager ETF investors employing fixed income ETFs significantly increased. The biggest and potentially most important increase occurred in domestic fixed income, where the share of asset managers jumped to 72 per cent in 2014 from 30 per cent in 2013. For international fixed income, in 2013, asset managers reported virtually nothing in the way of ETF. In 2014, nearly half of asset manager ETF investors are employing the vehicles in that asset class.
Gamba says: “The role that ETFs play in institutions’ portfolios has quickly transformed in five years. Today ETFs play an important role in institutions’ portfolios in multiple ways strategically and tactically. And all signs point to continued acceptance and usage by institutional investors.”