ETF Investment Flourishes in Institutional Market

The Greenwich Associates 2018 U.S. ETF Study highlights increased use of exchange-traded funds (ETFs) alongside the shift to a rising interest-rate environment and increased equity market volatility.

Some 180 institutions participated in the 2018 edition of the ETF Study. This group increased their use of ETFs in 20 of the 21 equity and fixed-income product categories covered in the research. 

“As they ready their portfolios for the end of the Goldilocks market, U.S. institutions are integrating ETFs more deeply into their portfolio management and investment strategies,” says Andrew McCollum, Greenwich Associates managing director. “Driving this expansion is ETF versatility. ETFs are being adopted in portfolios alongside, and in some cases in place of, individual stocks and bonds, mutual funds and derivatives as a source of primary beta exposures for use in a wide variety of active and passive investment strategies.”

According to Greenwich Associates, institutional investors are making greater use of ETFs in “strategic portfolio functions.”

“They are using ETFs to obtain investment exposures in core portfolio allocations, and as building blocks in top-down strategies that create alpha through asset allocation, as opposed to security selection,” the analysis states. “They are also employing ETFs to guard portfolios against volatility—a task growing numbers of institutions are addressing with smart beta ETFs.”

Data in the report shows the share of study participants investing in non-market-cap-weighted/smart beta ETFs increased to 44% in 2017, up from 37% in 2016.

“Meanwhile, institutions continue relying on ETFs as a liquid, fast and relatively low-cost tool in a wide range of tactical tasks, such as managing cash flows and making tactical changes to their portfolios,” Greenwich Associates reports.

Overall, about a third of current ETF users in the study plan to increase allocations to the funds in the coming year, and significant shares of non-users say they are likely to start investing in ETFs in the next 12 months.

“Institutions are planning the biggest allocation increases in fixed income, where they are using the funds to enhance liquidity and otherwise prepare for a new era of quantitative tightening,” McCollum concludes. “These results point to continued growth in institutional ETF investment in the remainder of 2018 and into 2019. That growth could actually accelerate if continued increases in volatility place a premium on ETF features, including enhanced liquidity, operational efficiency and lower costs.”

Additional findings and other research reports are available at https://www.greenwich.com/.