Demand for exchange-traded funds (ETFs) among Continental European institutions is expected to grow by nearly a fifth in 2016, according to a report, ETFs in the European Institutional Channel, from Greenwich Associates.
The study, commissioned by BlackRock, interviewed 123 European-based institutional investors about their use and perceptions of ETFs. 68 were exchange traded fund users and 55 were non-users. The respondent base consisted of 58 pension funds, 46 asset managers and 19 insurance companies.
The next 12 months will likely bring increases in both adoption rates and the overall amount invested in ETFs. Approximately a quarter of Continental European institutions and 20 per cent of UK pension schemes invest in ETFs, and 17 per cent of institutions on the Continent not currently investing in ETFs plan to start using the funds in the next year. Over the same period, more than a third (35 per cent) of investors in Continental Europe plan to increase their investments in ETFs.
ETF allocations among institutional users now account for nearly a tenth (9.3 per cent) of their portfolios, an increase from 7.2 per cent in 2014. The products were most popular amongst asset managers with nearly three-quarters (72 per cent) using ETFs and allocating the highest proportion of total assets (10 per cent) to them.
ETFs are most commonly used by European institutions to access equity markets, with 94 per cent having integrated ETFs into their equity portfolio. Beyond equities, six in 10 ETF investors are using them to access fixed income markets and four in 10 access other asset classes, including commodities and real estate. Similarly, the funds are increasingly used as a cost effective replacement for derivatives.
According to the report, five factors will drive the expansion of ETFs throughout institutional investment portfolios in Europe.
Firstly, according to the report, Bond ETFs will thrive with six in 10 ETF investors using them to access fixed income markets. Nearly a quarter have only started to do so in the past two years. The primary drivers among bond users are ease of use (72 per cent), liquidity (69 per cent) and single trade diversification (69 per cent). BlackRock predicts global fixed income ETF assets could surpass USD2 trillion by 2025.
Secondly, ETF holdings are nearly evenly split between strategic and tactical assets (51 per cent vs 49 per cent). But a steady growth of institutions using ETFs for activities such as rebalancing (over 55 per cent) point to continued adoption.
Thirdly, almost half of respondents shifted from derivative products to ETFs in the past year, with 17 per cent doing so because of operational simplicity and another 17 per cent switching because ETFs were cheaper. In the coming year, 41 per cent of institutional investors plan to replace an existing equity futures position with an ETF, nearly one in five (19 per cent) plan to do so with fixed income positions and one in ten (11 per cent) are expecting to replace commodities positions.
Fourthly, over a fifth of institutional investors are investing in smart beta (non-market-cap weighted) ETFs, with these products particularly popular among asset managers. Nearly six in 10 (57 per cent) of current users of smart beta funds plan to increase their allocation in the next year, with half expecting to increase allocations by 10 per cent or more.
And finally, demand for multi-asset portfolios among institutional investors is growing. Nearly four in five (79 per cent) asset managers use ETFs in their portfolios, and over a fifth (22 per cent) of total assets are invested through an ETF. Approximately one quarter of asset managers are likely, or very likely to offer, a strategy made only of, or predominately of, ETFs in the future.
Fergus Slinger, Co-Head of iShares Sales EMEA at BlackRock, says: “ETFs are revolutionising the way institutions invest. It began with equity ETFs, but has spread to other asset classes to become a staple of long-term portfolios. And because once they start they tend not to stop, we expect European usage to sky rocket as investors become even more familiar with the precision and versatility that ETFs afford – whether the aim is to address liquidity challenges in bond allocation, outperform broad market returns using smart beta strategies or replace futures with ETFs to reduce costs.”