Demand for exchange-traded funds among Continental European institutions is expected to grow by nearly a fifth in 2016, according to a report, ETFs in the European Institutional Channel from Greenwich Associates…..
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· Adoption rates set to surge, particularly in fixed income and smart beta
· Almost 50% used ETFs to replace derivatives products
The study, commissioned by BlackRock, interviewed 123 European-based institutional investors about their use and perceptions of ETFs. 68 were exchange traded fund users and 55 were non-users. The respondent base consisted of 58 pension funds, 46 asset managers and 19 insurance companies.
The next 12 months will likely bring increases in both adoption rates and the overall amount invested in ETFs. Approximately a quarter of Continental European institutions and 20% of UK pension schemes invest in ETFs, and 17% of institutions on the Continent not currently investing in ETFs plan to start using the funds in the next year. Over the same period, more than a third (35%) of investors in Continental Europe plan to increase their investments in ETFs.
ETF allocations among institutional users now account for nearly a tenth (9.3%) of their portfolios, an increase from 7.2% in 2014. The products were most popular amongst asset managers with nearly three-quarters (72%) using ETFs and allocating the highest proportion of total assets (10%) to them.
ETFs are most commonly used by European institutions to access equity markets, with 94% having integrated ETFs into their equity portfolio. Beyond equities, six in 10 ETF investors are using them to access fixed income markets and four in 10 access other asset classes, including commodities and real estate. Similarly, the funds are increasingly used as a cost effective replacement for derivatives.
Top five drivers of ETF usage
According to the report, five factors will drive the expansion of ETFs throughout institutional investment portfolios in Europe:
1. Bond ETFs to thrive: six in 10 ETF investors use them to access fixed income markets, with nearly a quarter only starting to do so in the past two years. The primary drivers among bond users are ease of use (72%), liquidity (69%) and single trade diversification (69%). BlackRock predicts global fixed income ETF assets could surpass $2trn by 2025.
2. Strategic uses on the rise: ETF holdings are nearly evenly split between strategic and tactical assets (51% vs. 49%). But a steady growth of institutions using ETFs for activities such as rebalancing (over 55%) point to continued adoption.
3. ETFs are replacing derivatives: Almost half of respondents shifted from derivative products to ETFs in the past year, with 17% doing so because of operational simplicity and another 17% switching because ETFs were cheaper. In the coming year, 41% of institutional investors plan to replace an existing equity futures position with an ETF, nearly one in five (19%) plan to do so with fixed income positions and one in ten (11%) are expecting to replace commodities positions.
4. In with the new, smart beta ETFs gains traction: over a fifth of institutional investors are investing in smart beta (non-market-cap weighted) ETFs, with these products particularly popular among asset managers. Nearly six in 10 (57%) of current users of smart beta funds plan to increase their allocation in the next year, with half expecting to increase allocations by 10% or more.
5. ETFs to benefit from multi-asset boom: demand for multi-asset portfolios among institutional investors is growing. Nearly four in five (79%) asset managers use ETFs in their portfolios, and over a fifth (22%) of total assets are invested through an ETF. Approximately one quarter of asset managers are likely, or very likely to offer, a strategy made only of, or predominately of, ETFs in the future.