January 24, 2014

iShares Sees 3 Big Trends for Institutions’ ETF Use in 2014

Following ‘test drives’ by many last year, BlackRock unit expects institutions, including RIAs, to increasingly use ETFs strategically and tactically in 2014

On Thursday, iShares released its Institutional Outlook for 2014, delineating three major trends it expects to play out this year in institutions’ use of ETFs.

In a statement, Daniel Gamba, head of iShares Americas Institutional Business at BlackRock, said that in 2013 “new institutions such as regional banks, insurance general accounts and new global asset managers ‘test drove’ ETFs for the first time.”

Considering factors that may increase market volatility this year, Gamba said that for those institutions, ETFs will likely be an important part of their “investment toolkit tactically and strategically due to their ease of use, diversification, liquidity and access to targeted exposures.”

The three major trends iShares expects in 2014 are: 

1)  ETF Product Innovation With Input From Clients

iShares expects to see ETFs “replicating high-quality benchmarks at competitive prices being used in strategic portfolios by asset managers, pension plans” VA manufacturers, RIAs and non-U.S. institutions. Specifically, institutions are expected to increase their use of non-market cap-weighted ETFs, including factor and minimum-volatility ETFs, which attracted $51.5 billion in inflows globally in 2013. ETF providers will need to include institutions in their product development process, iShares said, much as they have already done in some recent ETF introductions. 

2) Continued Growth in ETF Usage by Asset Managers and Strategists

The use of ETFs among global asset managers’ portfolios increased 32% to $179.5 billion from Q3 2012 to Q3 2013, reflecting asset managers’ desire to achieve alpha, iShares said, in balanced funds, global asset allocation funds, defined contribution funds and even annuities. Growth is also expected for what iShares calls ETF investment strategists, who build ETF-based model portfolios for advisors, small pensions and individual investors. 

3)     Growth in Fixed-Income ETFs 

As investor search for yield in fixed income amid the prospects of rising interest rates, they will increasingly look to fixed income ETFs. Already in 2013, according to Greenwich Associates, 55% of all large institutions and RIAs used domestic fixed income ETFs. Some large institutions are  “moving hundreds of individual bonds into a handful of ETFs for ease of operation and liquidity, while others are using ETFs because they don’t have the internal resources to analyze hundreds of individual bonds.” Fixed income ETFs can provide to those institutions both the exposure and liquidity they need.

Many institutions are already moving into higher-yielding sectors such as investment-grade corporates, iShares reported, while it expects insurers to take a “more flexible approach” to their bond holdings to “enhance yield or reduce duration.”

As more “types of investors” use fixed income ETFs, iShares says, they will demand new products, including those that focus on short duration, target maturity and international exposures.

 

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Check out Market Vectors Rolls Out Factor-Based ETFs on ThinkAdvisor.

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