U.S. institutional investors will continue to fuel growth in the exchange-traded fund industry in 2016, according to a new report from Greenwich Associates.
At present, these investors represent about 36% of the $2.1 trillion invested in U.S. ETF assets, or $756 billion.
Between August and November, Greenwich Associates interviewed 51 pensions, endowments and foundations; 47 RIAs; 41 asset managers; 24 insurance companies and 20 investment consultants about their use and perceptions of ETFs.
The study, which was sponsored by BlackRock, found that all ETF users invested in equity funds, with 36% planning to add to their allocations this year. Thirty-five percent planned to increase their investment by 10% or more.
Similarly, 35% of fixed income ETF users said they would boost allocations in 2016, and 36% of those said they would do so by 10% or more.
Some 43% of respondents said they invested 10% or more of their overall portfolio in ETFs, and nearly 20% were considering adding ETFs to their portfolios in the coming year.
Eighty-two percent of investors told interviewers that matching the exposure they needed was their most important consideration when selecting a fund.
Liquidity/trading volume was another important factor for 76% of ETF users, followed by expense ratio for 72% and a fund’s tracking error for 68%.
The study identified five trends that are driving U.S. institutions’ use of ETFs.
1. Strategic Assets
Last year, 68% of institutions in the study were using ETFs as a primary vehicle to implement long-term strategies, up from 58% in 2013 and 63% in 2014. The main use of ETFs in institutional portfolios was obtaining core exposures — “undoubtedly a strategic function,” according to the study.
2. Expanding Fixed Income ETF Use
Another driver of growth was the use of fixed income funds by 65% of institutional ETF investors. The report said declining liquidity in traditional fixed income markets in recent years had prompted many institutions to adopt fixed income ETFs, as their liquidity had increased substantially over the same period.
3. Side-by-Side with Derivatives
The study found that investors were increasingly evaluating ETFs along with derivatives to determine the best way to hedge or gain market exposure. More than half of respondents said they had replaced derivative products, such as equity futures contracts, with ETFs in the past year. In addition, 78% of futures users said they planned to replace an existing futures position with an ETF in the next 12 months.
4. Innovative Approaches
Some 30% of institutions in the study reported that they employed smart beta ETFs, and the same percentage used currency hedged ETFs.
At the same time, asset managers offering multi-asset-class funds were using ETFs to fully implement strategies or scale their products. Managers running these funds said ETFs now made up 48% of assets in their multi-asset portfolios.
5. Insurance Companies Boost Usage
Fifty-nine percent of insurer respondents in the study said they used ETFs to invest surplus assets, way up from 30% that did this in 2013. Moreover, insurers’ use of ETFs to invest reserve assets skyrocketed to 71% in 2015 from just 6% in 2013.
— Check out Are Fixed Income ETFs the New Cash? on ThinkAdvisor.