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Institutions Turn to ETFs for Active Strategies, Survey Finds

Institutions Turn to ETFs for Active Strategies, Survey Finds

Oct. 06, 2017

Oct. 06, 2017

Institutional investors are allocating more money into exchange-traded funds (ETFs), driven by an increasing use of the vehicles in active decisions, according to a new survey from Greenwich Associates.1

ETFs have grown as portfolio tools to perform tactical adjustments, gain international exposure and allocate money to asset classes via a one-stop trade. The funds, however, are increasingly being employed as well in active investment decisions thanks to new, innovative indexing products that track factor-based, alternative and multi-asset strategies.

“As they incorporate such innovative strategies into their portfolios, investors find themselves employing index products to achieve what amount to active exposures, with asset allocation replacing security selection as the primary source of alpha,” Greenwich wrote in the survey’s executive summary.

Investors withdrew $325.6 billion from active investment strategies in 2016, while pouring $563 billion into passive funds, according to Morningstar.2 Part of those inflows were spurred by institutional investors seeking ‘beta,’ or market, exposure through low-cost index strategies.

But investors are also looking for new sources of active outperformance, such as multi-asset index funds that generate ‘alpha’ returns through asset allocation as opposed to stock picking, Greenwich says. They are also turning to alternative-weighting products known as smart beta that seek premium returns from factors associated with long-term outperformance – such as value, size or momentum.

The new purpose adds to what have been the traditional drivers for use of ETFs. Among them, the search for liquidity, particularly in bond markets; and the simplicity of an instant trade for tactical purposes such as hedging or rebalancing.

For the 2016 Global ETF Study, Greenwich Associates interviewed 481 institutions in 21 countries. This included 174 institutional funds (public and corporate pensions, endowments and foundations), 161 asset managers and 86 insurance companies.

More inflows from institutional investors likely

The share of institutional ETF users investing in smart beta ETFs increased to 36% in 2016 from 30% in 2015, according to the survey. The two most popular fund types in this category are minimum-volatility and dividend ETFs.

Almost 45% of institutions that use derivatives to access beta say they have replaced an existing derivatives position with an ETF in the past year, and 40% plan to do so in the next year, the survey found.

In all regions, survey respondents who said they plan to increase allocations to equity and fixed-income ETFs in the coming year vastly outnumbered those who replied that they are likely to decrease investments.

Greenwich has predicted that institutional investment flows into ETFs will reach $300 billion annually by 2020. PwC has forecast that all assets invested in ETFs globally will likely top the $7-trillion mark by 2021.3

1 ‘Active Strategies, Indexing and the Rise of ETFs,’ Greenwich Associates, Sep. 7, 2017.

2 ‘U.S. Equity Index Funds See Biggest Monthly Inflows Ever as Investors Make Post-Election U-Turn,’ Morningstar, Dec. 15, 2016.

3 ‘ETFs – A roadmap to growth,’ PwC, Jun. 29, 2016.

 

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