Eugene Grygo, chief content officer, FTF
The love affair between U.S. institutional investors and exchange-traded funds (ETFs) is showing no signs of slowing down.
A new report “ETFs: U.S. Institutions’ New Tool of Choice for Portfolio Construction,” from market research firm Greenwich Associates finds that “institutional investments in ETFs increased significantly in the United States in 2018. Average allocations by institutions currently investing in ETFs jumped to 24.8 percent of total assets, up from 18.5 percent in 2017, among the 181 institutional ETF investors participating in.”
The percentage for 2018 “tops allocations among institutions in Canada, Europe, Asia, and Latin America.” The report grew out of the Greenwich Associates 2018 U.S. Exchange-Traded Funds Study, the ninth annual edition of the study.
The results are based upon interviews with 181 institutional investors between October and December 2018, according to Greenwich Associates. “The research universe included 44 investment managers, 37 institutional funds, 33 insurance companies/insurance company asset managers, 56 registered investment advisors (RIAs), 11 investment consultants, as well as representation from family offices and other types of institutional investors. Most of the participants are large institutions,” according to the firm.
In addition, nearly 40 percent of the institutions in the study have assets under management (AUM) “totaling more than $10 billion, and nearly half manage in excess of $5 billion,” according to the firm. “The research universe included 120 portfolio managers/chief investment officers, 49 research analysts, six traders, and representation from buy-side sales, marketing, product development, and compliance departments.”
The “significant pick-up last year in institutional use of ETFs” was the result of investors adjusting portfolios “for resiliency in the face of market volatility,” says Andrew McCollum, author of the report and managing director, investment management, for Greenwich Associates.
The report also identifies “three powerful trends” driving firms to add ETFs to their portfolios:
- Turbulence Drives Demand: “A confluence of events ranging from interest-rate hikes and fears of recession, to trade wars and Brexit had institutions laser-focused on risk management in 2018. As they repositioned their portfolios to address these risks, many U.S. institutions used ETFs to implement specific changes. Study participants say they chose ETFs for an ease of use that allowed them to quickly and seamlessly integrate new exposures into strategies across portfolios and asset classes, and to take advantage of other characteristics such as speed of execution, single-trade diversification and liquidity.”
- The Index Revolution Proceeds: “U.S. institutions continued shifting assets from active management to index strategies, and 78 percent of study participants name ETFs as their preferred vehicle for index exposures. As ETFs displace other investment vehicles in institutional portfolios, active mutual funds are by far the most common vehicles being replaced. This transition should fuel additional demand for ETFs as institutions continue shifting assets to index strategies.”
- Proliferation Across Portfolios: “Institutional investors continue expanding the list of portfolio functions in which they are applying ETFs. The spread of ETFs is being fueled in large part by versatility that allows them to serve a broad range of strategic and tactical purposes, and by their role as institutions’ preferred vehicle for factor-based/smart beta and other specialized exposures. Going forward, institutions’ integration of ESG [environmental, social and governance] principles into their portfolios and investment processes could give a further boost to ETF demand.”
It’s not a given that ETFs can sustain this rapid pace of expansion in 2019, but McCollum expects “the growing list of uses and overall assets invested to continue to grow in 2019, as more than 40 percent of equity and bond ETF investors in the study plan to increase ETF allocations in the year ahead.”
The full report can be found here.
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