European institutions plan to ramp up ETF usage, finds Greenwich Associates

Jan 26th, 2016 | By | Category: Fixed Income

Demand for exchange-traded funds among Continental European institutions is expected to grow by nearly a fifth in 2016, according to a study from Greenwich Associates.

The study, commissioned by BlackRock, interviewed 123 European-based institutional investors about their use and perceptions of ETFs. Sixty-eight were ETF users and 55 were non-users. The respondent base consisted of 58 pension funds, 46 asset managers and 19 insurance companies.

According to the study, the next 12 months will likely bring increases in both adoption rates and the overall amount invested in ETFs. Approximately a quarter of Continental European institutions and 20% of UK pension schemes invest in ETFs, and 17% of institutions on the Continent not currently investing in ETFs plan to start using the funds in the next year. Over the same period, more than a third (35%) of investors in Continental Europe plan to increase their investments in ETFs.

ETF allocations among institutional users now account for nearly a tenth (9.3%) of their portfolios, an increase from 7.2% in 2014. The products were most popular amongst asset managers with nearly three-quarters (72%) using ETFs and allocating the highest proportion of total assets (10%) to them.

ETFs are most commonly used by European institutions to access equity markets, with 94% having integrated ETFs into their equity portfolio. Beyond equities, six in 10 ETF investors are using them to access fixed income markets and four in 10 access other asset classes, including commodities and real estate. Similarly, the funds are increasingly used as a cost effective replacement for derivatives.

Top five drivers of institutional ETF usage

According to the report, five factors will drive the expansion of ETFs throughout institutional investment portfolios in Europe:

  1. Liquidity needs will fuel demand for ETFs in fixed income. In both Europe and the U.S., institutional investors have experienced a reduction in secondary-market trading liquidity. Meanwhile, ETF liquidity has been increasing. Based on these trends, Greenwich Associates expects the share of European institutions using bond ETFs to grow along with overall institutional fixed income assets devoted to ETFs.
  2. ETFs are increasingly being used for core, strategic and tactical applications. European institutions continue to discover new applications for ETFs. Although ETF use remains weighted toward tactical functions, nearly two-thirds of European institutional ETF investors use the funds to obtain core exposures, and about the same share use ETFs to achieve international diversification—another important strategic function.
  3. Growing numbers of European institutions are using ETFs to replace derivatives positions. Almost half the institutions in the study shifted from derivatives products to ETFs in the past year, and 41% plan to replace an existing equity futures position with ETFs in the coming year.
  4. Innovative fund types, such as smart-beta ETFs, will provide new ways for investors to obtain exposures. Among study participants, more than half of current users of non-market-cap-weighted/smart-beta ETFs plan to increase allocations to these funds in the next 12 months and sizable shares plan to initiate or increase investments in other new strategies.
  5. The growing popularity of multi-asset funds is creating new demand for ETFs among the asset managers that offer these products. Approximately 80% of the asset managers in the study offer multi-asset funds in which they employ ETFs to gain exposures. Within these funds, the asset managers invest 22% of total assets in ETFs.

Commenting on the findings, Andrew McCollum, Managing Director at Greenwich Associates, said: “These findings suggest the flexibility and adaptability that allow institutions to find new ways to apply ETFs in their portfolios will play a central role in the continued proliferation of the funds in the institutional channel”.

Fergus Slinger, Co-Head of iShares Sales EMEA at BlackRock, added: “ETFs are revolutionising the way institutions invest. It began with equity ETFs, but has spread to other asset classes to become a staple of long-term portfolios. And because once they start they tend not to stop, we expect European usage to sky rocket as investors become even more familiar with the precision and versatility that ETFs afford – whether the aim is to address liquidity challenges in bond allocation, outperform broad market returns using smart beta strategies or replace futures with ETFs to reduce costs.”

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