Institutional investors, always on the hunt for alpha and increasing their returns, are looking towards exchange traded funds more and more.
That’s the viewpoint of Greenwich Associates’ most recent market study, which showed institutional investors are using ETFs more in their portfolios and are allocating a greater amount of cash and space to the asset class.
The Greenwich study, “ETFs: An Evolving Toolset for U.S. Institutions,” was sponsored by BlackRock and found that institutional investors are adopting ETFs both as an every-day tool in routine portfolio functions and as a means of obtaining long-term strategic investment exposures.
Greenwich reported that as recently as 2011, fewer than 15 percent of U.S. institutions were using ETFs in their portfolios. That share has now climbed to 18 percent in 2012 and reached 21 percent in 2013, according to data collected in Greenwich Associates 2013 U.S. Institutional Investors Study. Those overall averages understate the extent to which ETFs are used by certain types of investors. For example, 40 percent of U.S. endowments employ ETFs in their portfolios, as do 33 percent of the largest public defined-benefit pension funds (those with at least $5 billion in AUM) and roughly 25 percent of the largest corporate defined-benefit funds.
“What we’re seeing is a broadening of ETF use,” said Greenwich Associates consultant Andrew McCollum, author of the study. “Institutions are finding that ETFs are an effective tool for implementing their portfolio strategies and obtaining core exposures, while at the same time they are continuing their use for the tactical applications in which many investors were first introduced to ETFs.”
The consultancy also reported several other institutional developments within the ETF space.
First, the share of U.S. institutions using ETFs has increased in each of the past five years and is expected to rise in the coming year.
Second, nearly half of institutional ETF users now allocate more than 10 percent of total assets to asset class.
Thirdly, ETFs are gaining traction in asset classes outside equities, especially in fixed-income, where changes in market structure could boost ETF use. Greenwich reported that the share of institutional users employing ETFs in domestic fixed-income increased to 66 percent in 2014 from just 55 percent in 2013. Another 35 percent of institutions overall are utilizing ETFs for international fixed-income access, up from 29 percent last year. Forty percent of the institutional ETF users employ the vehicles in commodities, and 45 percent are using ETFs in REITS.
Also, ETF holding periods are lengthening, Greenwich said. Institutions are reporting longer average holding periods – more than two years or longer – has increased to 49 percent in 2014 from 36 percent in 2013.
Although ETFs represent a small percentage of total U.S. institutional assets, some institutions have begun building sizable ETF allocations. Forty-six percent of institutional ETF users participating in the Greenwich Associates 2014 U.S. Exchange-Traded Funds Study allocate 10 percent or more of their total assets to ETFs, with almost three in 10 reporting ETF allocations from 10 percent to 25 percent and nearly one in five institutions making even greater allocations.
The results of the study suggest ETFs will continue to gain momentum in the coming year, Greenwich concluded. Among institutions currently employing ETFs in their portfolios, nearly 50 percent said they expect to expand use in the next year. One third of the institutions in the 2014 study expect to grow allocations by 1 percent to 10 percent, while nearly 15 percent plan to increase by 10% or more.
