Tuesday, April 24, 2018 Stamford, CT USA — U.S. institutional investors preparing their investment portfolios for the return of volatility and the shift to a rising interest-rate environment are stepping up their use of exchange-traded funds.
The 180 institutions participating in the Greenwich Associates 2018 U.S. ETF Study increased their use of ETFs in 20 of the 21 equity and fixed-income product categories covered in the most recent study.
“As they ready their portfolios for the end of the “Goldilocks” market, U.S. institutions are integrating ETFs more deeply into their portfolio management and investment strategies,” says Andrew McCollum, Greenwich Associates Managing Director and author of a new report, ETFs: Valuable Versatility in a Newly Volatile Market.
Driving this expansion is ETF versatility. ETFs are being adopted in portfolios alongside, and in some cases in place of, individual stocks and bonds, mutual funds and derivatives as a source of primary beta exposures for use in a wide variety of active and passive investment strategies.
Institutions are making greater use of ETFs in strategic portfolio functions. They are using ETFs to obtain investment exposures in “core” portfolio allocations, and as building blocks in top-down strategies that create alpha through asset allocation, as opposed to security selection. They are also employing ETFs to guard portfolios against volatility—a task growing numbers of institutions are addressing with smart beta ETFs. (The share of study participants investing in non-market-cap-weighted/smart beta ETFs increased to 44% in 2017 from 37% in 2016.)
Meanwhile, institutions continue relying on ETFs as a liquid, fast and relatively low-cost tool in a wide range of tactical tasks, such as managing cash flows and making tactical changes to their portfolios.
“Investors continue to turn to ETFs to express their views in fast-changing markets. During volatile global equity market activity in February, clients utilized ETFs for efficient liquid market exposures through the secondary market. Investors are also creating solutions using ETFs in innovative ways to drive absolute return and positive outcomes,” says Ravi Goutam, Head of iShares Pensions, Foundation & Endowments team at BlackRock.
More Growth Ahead
About a third of current ETF users in the study plan to increase allocations to the funds in the coming year, and significant shares of non-users say they are likely to start investing in ETFs in the next 12 months. Institutions are planning the biggest allocation increases in fixed income, where they are using the funds to enhance liquidity and otherwise prepare for a new era of “quantitative tightening.”
These results point to continued growth in institutional ETF investment in the remainder of 2018 and into 2019. “That growth could actually accelerate if continued increases in volatility place a premium on ETF features, including enhanced liquidity, operational efficiency and lower costs,” says Andrew McCollum.