Institutional Investors Employing More ETF Strategies

Institutional investors’ and advisers’ usage of exchange-traded funds (ETFs) continues to evolve and the products are becoming a cornerstone of their portfolios, suggests a study by Brown Brothers Harriman (BBH) and ETF.com.

The 2016 US ETF Investor Survey found one-third hold at least 11 ETFs in their portfolios. For the second year in a row, the largest number of respondents have six to 10 ETFs in their portfolios.

Ninety-seven percent of investors plan to maintain or add to their smart-beta positions next year. Minimum volatility (44%) and quality strategies (42%) are top priorities when selecting a smart-beta ETF.

Investors are looking for more options when it comes to ETFs with international fixed income and commodity exposure. For the third year in a row, more investors are looking for fixed income in actively-managed ETFs, the survey found. Sixty-seven percent of respondents stated that liquidity is an important concern for fixed income ETFs. In addition, nearly two-thirds of ETF investors would consider an ETF engaging in securities lending.

“Investors are finding new avenues to use ETFs, and they want more options for active ETF, smart beta and fixed income products,” says Shawn McNinch, Global Head of ETF Services at BBH. “This year’s survey demonstrated that investors are gaining comfort in employing factor based strategies through smart-beta ETFs and using these products to position their portfolios against volatility and uncertainty, often by reducing allocations to active and even traditional cap-weighted strategies.” 

Thirty-seven percent of respondents stated that environmental, social and governance (ESG) factors are important when selecting an ETF.

The survey also found 75% of investors are comfortable buying an active ETF with a track record of three years or less, and almost two out of three are comfortable with buying new passive ETFs in the first year.

“Investors’ outlook on ETFs suggests more willingness to use strategies with shorter track records, both for passive and active funds.  For ETF issuers, these results support an increase in ETF product development and a focus on clearly defined distribution strategies in a competitive market,” says McNinch.

The 2016 survey polled 175 financial advisers and institutional investors. The full study report may be downloaded from www.bbh.com/etfsurvey.