Increase use of exchange traded funds (ETFs)
A study by Greenwich Associates has found that institutional investors have increased their use of exchange traded funds (ETFs) as a result of higher volatility due to geopolitical events and concerns about lack of liquidity, especially in the fixed income market.
Users of ETFs
According to the study of some 132 institutional investors in Europe, insurers have become the most common users of ETFs, surpassing asset managers, which were the most prolific users of these vehicles in 2015.
Some 89% of insurers now use ETFs for investments, according to the study which was commissioned by BlackRock, up from 63% the previous year. Asset managers have increased their use of these products too, with 85% investing through ETFs, while nearly six out of ten pension funds now use them, up from 40% in 2015.
Five key factors driving incrased institutional investor ETF use
According to the report, there are five key factors driving investors towards ETFs. The recent volatility in markets, which resulted from the Brexit vote and the unexpected outcome of the US Presidential Election, has meant the share of institutions using ETFs as a risk management tool has increased from 28% to 36% over 2016.
Meanwhile, institutional investors also continued to worry about liquidity drying up in the fixed income market, and have embraced ETFs as a tool to enhance this. Some 45% of institutions responding to the study have been using these tools, compared to 36% in the previous year.
Greenwich Associates found that the latter is likely to be the key reason for institutions using ETFs for the first time, with one in ten respondents saying they are likely to venture into the space this year, especially as concerns grow over the effects of the Basel III regulation on liquidity in the bond market.
Institutions are also using these vehicles to complement and replace other allocation options, with a third of respondents replacing their existing futures positions with ETFs in 2016, and half of ETF users expecting to do so this year (primarily led by asset managers and insurers).
Respondents were also keen to navigate a low interest rate environment while managing risk, turning to smart beta ETFs for this purpose.
Some three quarters of current ETF users are expecting to increase their allocations to the smart beta space in 2017. This is a considerable increase on the previous year, when only 57% of those surveyed said they were likely to invest more in this area. Asset managers are particularly keen, with four out of five saying they intend to do this.
Lastly, institutional investors are using ETFs to access markets they expect to outperform in 2017, and therefore a large percentage of flows is going into equity products. Some 86% of respondents use equity ETFs, of which a third plan to increase their allocations this year.
Developed markets are the more popular, with 47% of European institutions expecting these to be the best performing asset classes by the end of the year, while 29% say emerging market equities will be the overall winners.