Institutional investors across Canada are expanding their use of ETFs, according to a Greenwich Associates study sponsored by BlackRock Asset Management Limited.
The survey found 40% of institutional funds and asset managers expect to use ETFs more in the coming year, up from just above a third last year.
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While institutional investors use ETFs most widely in equity portfolios (80% use them for domestic equity and 85% for U.S. equity exposure), the study revealed increased use in fixed-income allocations.
Half the institutions surveyed employ ETFs in fixed income, and more than 20% of those using bond ETFs began doing so less than two years ago. Among asset managers, 57% are now using ETFs in fixed income, up from only 45% a year ago.
The most frequently cited benefits for institutions: ease of use and ease of access, as well as high liquidity. In a low-yield environment, institutional investors are seeking new sources of yield and looking for better and more efficient ways to access the asset class in a shifting interest-rate environment. Coupled with their heavy usage of passive index strategies, institutions are increasingly turning to ETFs to achieve those efficiencies. In fact, more than a quarter of institutions now using ETFs in fixed income plan to increase allocations to bond ETFs in the coming year.
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And more institutions are using ETFs to gain exposure to illiquid or hard-to-access asset classes. According to the study, 38% deploy ETFs in commodities and 27% use the funds in REITs.
ETFs have long been used by institutional investors as tactical tools in manager transitions, portfolio rebalancing or cash equitization. Those remain important uses, as about two-thirds of institutional ETF users say they deploy ETFs to make tactical adjustments to portfolios.
However, half the institutions surveyed say their use of ETFs is mainly strategic. Two-thirds of this group use ETFs to obtain passive exposures in the core components of core/satellite strategies, while other common strategic applications include portfolio completion, hedging and liquidity sleeves.
According to the study, asset managers holding ETFs longer than two years grew to 31%, up from 24%.
While the uses of ETFs vary, institutional investors seem to agree on the most important criteria for ETF selection: liquidity and trading volume. More than three-quarters cited liquidity/trading volume as an important factor in selecting a fund, while 83% said they are concerned about the liquidity of funds in which they invest.
The second most important criteria overall was cost, but asset managers are far more concerned with expenses than institutional funds are: 60% of asset managers cite cost as an important consideration, compared with just 17% of institutional funds.