ETFs set to keep on trucking in Europe
More financial advisers and institutional investors in the US are using exchange traded funds (ETFs) in a greater variety of ways, paving the road ahead for the younger European market.
A new study in the US found the use of ETFs has evolved into a segment of advisers and asset managers who provide dedicated ETF advice on portfolio construction and implementation guidance, in outsourced managed accounts or defined contribution model portfolios.
This segment has grown significantly since 2008 when the Guide to ETF Investment Managers listed 25 managers and $5.8 billion (£4.6 billion) in total assets under management. Today, it is tracking more than 200 ETF strategies from more than 100 managers who represent $46 billion in assets, marking an 800% increase in assets.
According to the research, nearly 80% of successful ETF investment strategists viewed increasing client satisfaction as a fundamental aspect of success.
Nearly seven out of 10 use ETFs in all of their outsourced portfolio strategies.
Three quarters of the managers who viewed their businesses as successful held at least 50% of their total assets in ETFs. Those with 80% or more of total assets in ETF-outsourced investment management were twice as likely to exceed their expectations for their business.
This survey, conducted by iShares, covered 130 randomly selected firms with assets ranging from over $5 billion to assets under $50 million with at least 5% of their total portfolio assets invested in ETFs.
Findings from another new survey found institutional investors in the US that began using ETFs for manager transitions, rebalancing and other tactical applications are increasingly employing ETFs for strategic purposes, such as gaining long-term exposures to desired asset classes.
The results of this study by Greenwich Associates show that 57% of institutional ETF users employ these products to achieve strategic allocation. This is a significant increase since last year, when, among ETF users, about 50% of institutional funds versus 60% this year and a quarter of asset managers versus one third this year said they used the product to achieve strategic allocation ranges.
These findings are based on interviews with 80 institutional investors, including corporate pensions, public pensions, and foundations and endowments, all collectively referred to as ‘institutional funds’, and large asset management firms.
Institutions are often first drawn to ETFs for help with two basic functions: manager transitions and cash equitisation or interim beta. Among users of ETFs, 78% of asset managers and 44% of institutional funds use the products for cash equitisation or interim beta.
Once institutions start using ETFs they often discover additional applications for the products. As ETFs are increasingly being used for strategic applications in institutional portfolios, the average institutional holding period for ETF investments has expanded meaningfully over
the past year.
About half of institutional funds using ETFs reported average holding periods of one year or more, with 36% reporting average ETF holding periods in excess of two years. In the prior year, only 36% of institutional funds reported average ETF holding periods of a year or longer.
Among current ETF users, 40% of institutional funds and one third of investment managers expect to increase allocations to ETFs in the next 12 months, while 22% of institutional funds and 14% of asset managers plan to trim ETF allocations.
Institutions generally use ETFs to implement passive exposures, and a significant number of institutions are using the products as a means of obtaining tactical active exposures in a variety of asset classes.
More than one in five asset managers that use ETFs report employing them for active exposures in domestic equities and commodities, and about 17% are using them for active exposures in international equities.
Understanding the trends in the use of ETFs in the US is important, as Europe tends to embrace these over time.