Institutions take ETFs beyond equities

Canada’s biggest investors haven’t wholeheartedly embraced exchange-traded funds (ETFs), but that could be changing, according to a new survey of institutional ETF use by Greenwich Associates. Tough investment conditions and rising interest rates in particular have increased institutional interest in using ETFs to gain exposure to new asset classes—not just equities. So while investors have traditionally seen them as a way to gain access to stocks, the institutional marketplace is changing the way they view and use these products.

The study marks a shift in attitude among institutional investors in Canada, and for ETFs, which were once seen as a retail product, it also marks their continued acceptance among the world’s most sophisticated investors. Particularly among those investors with $5 billion in assets or more—in this group, 27% are using ETFs compared to one in 10 for institutions overall. Forty percent of Canadian institutions currently using ETFs plan to increase their holdings within the next year—and, of those, more than a third plan to increase their allocations by 5% or more. Half of all institutional ETF users are planning to hold their allocations steady year over year.

The Greenwich study also had some interesting quotes from asset managers surveyed on what they like about ETFs—along with cost, liquidity and flexibility came a couple of comments about the role of ETFs versus traditional active managers.

First this:

“We were looking to put on some European bank exposure and don’t have a lot of expertise as far as managers. From there, we browsed ETFs and selected one.”

And then:

“We are expanding our use of ETFs because they now offer a wider array of choices in multiple asset classes.”

As ETFs gain traction among institutional investors and as ETF providers branch out into new asset classes, they appear to be attracting more attention from big investors—often as a way into a sector or segment of the market (European banks, for instance) over and above an active manager.

In the fixed income space, however, ETFs are really making headway as investors look for better and more efficient approaches to bonds at a time when interest rates are set to rise. Right now, more than 20% of Canadian institutions using bond ETFs started using them less than two years ago—57% are using ETFs for domestic fixed income, and 40% of institutions have 15% of more of their fixed income assets invested in ETFs.

More and more, ETFs are also being used strategically—according to the survey, more than half of the institutions that specified their primary use for ETFs describe their employment as mainly strategic in nature, while 47% indicate their use as chiefly tactical.