Thursday, March 9, 2017 Stamford, CT USA — For Canadian institutional investors, exchange-traded funds have taken on the role of a multi-purpose tool for portfolio management. 

In a new report, ETFs: “Active Tools” for Institutional Portfolio Management, Greenwich Associates interviewed 53 institutional investors for its 2016 Canadian ETF Study and they are now adopting ETFs for a range of more frequent short-term tasks: tactical adjustments to portfolios, rebalancing, transition management, cash equitization, and interim beta.

“Institutions in Canada are integrating ETFs into nearly every aspect of their portfolios, across asset classes, and into critical functions like risk, volatility and liquidity management,” says Greenwich Associates consultant Andrew McCollum.

Canadian institutions that use ETFs invest an average 16% of total assets in the funds, and ETF use and allocations will continue to grow. Twenty-eight percent of current equity ETF investors plan to increase allocations in the next year, as do 25% of current investors in fixed-income ETFs. That growth could accelerate due to increasing skepticism among institutions about the ability of active management strategies to add value in large liquid markets. 

Several additional trends will contribute to future ETF growth:

  • Need for New Solutions Fueling Demand for Innovative Products. Canadian institutions’ need for new sourcesof returns in a low-rate environment and tools to manage volatility is fueling demand for smart beta ETFs. Thirty-one percent of Canadian institutions invest in these funds.
  • Liquidity Concerns Fueling Demand for Fixed-Income ETFs. Approximately 80% of institutional bond ETF investors cite liquidity as a reason for using the funds. 
  • Institutions Diversifying Their Mix of Investment Vehicles. Almost 30% of Canadian institutions are diversifying their mix of investment vehicles they employ by swapping out certain positions in index mutual funds, active mutual funds, separate accounts, individual securities and derivatives for ETFs. 
  • Surge in Multi-Asset Funds Fueling ETF Demand. About a quarter of Canadian asset managers currently investing in ETFs are using the funds in multi-asset funds. Within these funds, the managers are allocating an average 26% of total assets to ETFs. 

Selecting an ETF Provider
Canadian institutions consider four primary factors when conducting due diligence on a potential ETF investment: the degree to which the ETF matches their exposure needs, liquidity/trading volume, the expense ratio of the fund, and performance/tracking error. 

Based largely on its performance in these key areas, iShares/BlackRock retained its position as the ETF provider of choice for Canadian institutions in 2016 with 89% of Canadian institutional ETF investors using iShares/BlackRock as a provider.