EQUITY ETFs COME OUT TOPS
In terms of the most popular ETF providers in Europe, the Greenwich research found 91% of institutional ETF investors use Blackrock iShares, followed by Deutsche Xtrackers/DBX Trackers at 62% and Lyxor at 43%. Other significant players include State Street, Vanguard, UBS, Amundi and Commerzbank.
Research also shows institutional investors were drawn to equity ETFs due to their ease of use, liquidity and attractive fees.
When it came to pension funds, the most popular products were simple benchmark-tracking ETFs such as the S&P 500, Eurostoxx 50, FTSE100 and MSCI World.
SMART BETA ETFs POPULAR
The fastest growing segment is smart beta, which has seen significant and continued interest from pension schemes.
This is due to claims of being able to capture broad, persistent drivers of returns, improve diversification in a portfolio and take advantage of economic insights.
Greenwich Associates reports over 20% of institutional ETF users in its study are now investing in non-market-cap-weighted/ smart beta products. That share approaches 30% among asset managers currently investing in ETFs.
The report states: “By far the most common of these funds are minimum-volatility ETFs, which are used by 86% of investors in non-market-cap-weighted/smart-beta ETFs. Half of these institutions use equal-weighted ETFs, 43% use multi-factor ETFs and 36% invest in single-factor funds.”
As more ETFs are launched, it seems institutional investors are open to the expansion, variety and adopting the more sophisticated products. Morningstar’s Garcia-Zarate says there is no specific information on the most popular ETFs adopted by institutional players.
“Pension funds have fairly long-term asset/liability-matching needs,” he adds. “Whether this means they’d be looking at long duration bond ETFs is not clear-cut, however. Pension funds are experts in the fixed income world, so it may be the case they use ETFs more tactically to meet short-term portfolio needs.”
Taking a step back and looking at the UK ETF market, Garcia-Zarate believes it is fair to say early adoption has mostly been driven by tactical needs.
He says: “The wide number of ETFs offering finely targeted exposures is very handy for portfolio managers. However, there is evidence that institutional investors are now increasingly using ETFs also as long-term core holdings.”
Garcia-Zarate believes the issue of cost is clearly at play here. “There is plenty of evidence that for some core plain vanilla equity and fixed income exposures, for example US large cap equities, there is little scope for active managers to add any meaningful value over a benchmark,” he says. “And that is before one factors in costs. Net of fees, the use of low-cost passive funds becomes a no-brainer.”
