A survey of 120 European institutions has found that pension funds, insurers and asset managers use exchange-traded funds (ETFs) for a wide range of purposes and hold them for much longer than commonly thought.
One in five intend to increase their use of ETFs in the next three years with around one in ten expecting to increase allocations by more than 10% within that time period.
The survey, conducted by Greenwich Associates and commissioned by BlackRock, interviewed 30 European asset managers, 22 insurers and 68 pension funds about their use of exchange-traded funds (ETFs). Out of the 120 surveyed, 83 were ETF users. Five of the main findings are:
1. ETFs are found in nearly three quarters of multi asset funds – 71% of European asset managers surveyed who use ETFs employ them within their multi asset funds. Over a third of asset managers use them within their equity funds, 52% say they used ETFs to invest in domestic bonds and 59% to access international bonds. Over half report that they are ‘likely’ or ‘very likely’ to manage an ETF-only product in the future.
2. Many institutions hold ETFs for a significant period of time – For a time there was a misconception that ETFs were primarily short term instruments. However only 6% of respondents who used ETFs to make tactical adjustments, and 2% using ETFs as a core allocation, held them for one month or less. Pension funds hold ETFs for an average of 29 months, the longest of those groups surveyed.
3. There are four common factors when choosing an ETF; cost is not always top priority – When asked about the factors influencing ETF selection, all three types of institution said the fund’s expense ratio, its liquidity or trading volume, its benchmark and its performance were the four most important aspects. However for insurers, ETF liquidity is the most important factor, whilst for pension funds the ETF’s expense ratio or cost is their top consideration.
4. European insurers are using ETFs to invest in international equity markets – 62% of insurance companies using ETFs do so to achieve international diversification, and this is particularly true in equities. 76% use ETFs to invest in international equities, compared with 57% to purchase domestic equities. Over half of insurance companies that use ETFs employ them to invest their surplus assets, with a third using them to invest their reserve assets.
5. Pension funds more likely to be strategic users of ETFs – European pension funds are more likely to use ETFs for strategic purposes than other groups. Over half of pension fund ETF users said that the majority of their ETF use was strategic in nature. As with insurers, many pension funds use ETFs to achieve international diversification (69%). 88% of the pension fund ETF users surveyed use ETFs in international equities, nearly three times as many as those using them for domestic stocks (30%).
Leen Meijaard, Head of EMEA iShares Sales at BlackRock, says: “ETFs are becoming a mainstay in the portfolios of European institutions. Many of the continent’s largest investors are putting ETFs to work in a wide variety of ways as institutions implement new approaches to generate the returns they require. We’re confident ETFs will form an ever greater part of that mix as the European ETF industry continues to grow at a record pace, as we saw in 2014.”
The survey by Greenwich Associates is entitled “ETFs: Broad Usage Increases Amongst European Institutional Investors” and is based on interviews with 120 European institutions. For a copy of the full report or for breakdowns of the insurance, pension fund and asset manager, please visit.