Facing a set of fast-changing global market conditions, European institutional investors are utilising the versatility of exchange-traded funds (ETFs) to adjust their portfolios, and integrating ETFs more deeply into both tactical and strategic investment processes and strategies.
The 125 institutions participating in the recent Greenwich Associates European ETF Study are contending with a host of challenges, including the return of volatility to global capital markets, the looming shift to a rising-rate environment, the impending end of European Central Bank bond buying and the ongoing implementation of MiFID II, and other new regulations.
As institutions create and implement strategies to meet these challenges, they are making greater use of ETFs, introducing them into a long list of functions that support their investment and portfolio management processes. Average ETF allocations among the institutions participating in the study increased to 10.3 per cent of total assets in 2017 from 7.7 per cent in 2016.
“After multiple years of regular use, European institutions have found ETFs to be simple, versatile and cost-effective tools, and they are ramping up their investments at a rapid clip,” says Greenwich Associates Managing Director Andrew McCollum.
Fergus Slinger, Co-Head of iShares EMEA sales at BlackRock, adds: “ETFs are the natural result of the evolution of the European financial market, where investors increasingly crave transparency, choice and value. MiFID II in particular, which mandates trade reporting, is helping to unveil the depth of liquidity in European ETFs and unlock new, creative ways for investors to build smarter portfolios.”
Much of the growth over the past year can be attributed to the entry of new institutional users to the ETF market – especially in fixed income. The share of study participants investing in fixed income ETFs increased to 45 per cent in 2017 from 38 per cent in 2016.
Institutions are adopting ETFs in other asset classes as well. Approximately one-quarter of European institutions used ETFs in REITs in 2017, up from 1 in 5 in 2016. Over the same period, the increase in commodities was even more pronounced, with use climbing to one-third of European institutions, up from just 20 per cent.
Investments in non-market-cap weighted/smart beta ETFs are growing steadily in institutional portfolios. The share of study participants investing in these funds has increased 10 percentage points in just two years, to 31 per cent. Given the increasing popularity of factor investing worldwide, demand for smart beta ETFs is expected to continue growing in both retail and institutional portfolios.
European investors are also more likely to express Environmental, Social and Governance (ESG) preferences in their portfolios compared to global counterparts. About half of European study participants have tilted investments into ESG strategies compared to 31 per cent of the global sample, and almost a third (27 per cent) of European institutions express these preferences using index products such as ETFs.
Multi-asset investment funds have emerged as one of the most consistent and fast-growing sources of ETF demand in the institutional channel. As investor appetite for these strategies grows, the share of European asset managers buying ETFs for use in multi-asset funds increased to approximately 80 per cent in 2017 from 63 per cent in 2016. Even with this strong momentum there is room for growth, since European asset managers running multi-asset funds allocate far fewer portfolio assets to ETFs than do their counterparts in the United States.
