Tuesday, June 14, 2016 Stamford, CT USA — Institutional investments in exchange-traded funds are projected to grow to $300 billion annually by 2020, according to a new report from Greenwich Associates.

The new report, Global Trends in Institutional ETF Adoption: Drivers for Growth Through 2020, presents the results of a Greenwich Associates study for which the firm interviewed 408 institutional investors in North America, Europe and Asia, including corporate pensions, public pensions, foundations, endowments, asset managers, insurance companies, investment consultants, and registered investment advisors (RIAs).

“The results of the study suggest future growth of ETFs in the institutional channel will be driven by the continued discovery of new and more sophisticated applications for the funds across investment portfolios,” says Andrew McCollum, Greenwich Associates Managing Director and author of the report.

Drivers of ETF Growth
2015 was a record-breaking year for ETFs as a category, which attracted more than $350 billion in new assets globally. Institutional investors are growing contributors to ETF demand, which has historically been driven by retail investors. An analysis of the research yielded five key drivers of institutional ETF adoption that Greenwich Associates projects together will generate approximately $300 billion in annual investments by 2020:

1.    The broadening use of ETFs across applications and asset classes will drive $132 billion in new annual demand in five years’ time.
2.    The migration toward using ETFs to obtain core exposures and achieve strategic goals will produce $42 billion in annual flows.
3.    Liquidity needs will fuel demand for ETFs in fixed income, driving $68 billion in new annual flows.
4.    Institutions using ETFs to replace derivatives positions will produce $28 billion in flows annually.
5.    Innovative exposures like smart-beta ETFs will attract $25 billion in annual flows.

These trends will attract new institutional users and increase institutional allocations to ETFs. Institutions that currently invest in ETFs allocate an average 15% of total assets to the funds, with allocations largest among Canadian and U.S. investors at approximately 20% of assets. Average allocations are considerably smaller among European ETF users, at 9% of total assets, and Asian ETF investors at 2%. Greenwich Associates projects that ETF allocations will climb to 25% of total institutional assets in North America, 15% in Europe and 10% in Asia.

“While institutional equity portfolios will remain a major source of growth for some time to come, the intersection of an increasingly diverse slate of institutional needs and the inherent flexibility of the ETF structure will spur the spread of the funds into new areas and asset classes,” says Andrew McCollum.