TORONTO, ONTARIO--(Marketwired - March 9, 2017) - Canadian institutional investors, who have led the world in their innovative applications of exchange traded funds to realize their investment strategies, are increasingly turning to ETFs not just for equity allocations, but also for smart beta and fixed income strategies, according to a recent Greenwich Associates study.
In its fourth annual study of institutional ETF use, sponsored by BlackRock Asset Management Limited (BlackRock Canada), Greenwich Associates found that the increasing innovation in ETF adoption is building on Canadian institutions' strong reliance on ETFs. Participating institutional investors - including asset managers, institutional funds and insurance-related firms - hold an average of 16 per cent of total assets under management in ETFs, and more than a quarter of respondents planned to increase their ETF holdings in the next 12 months.
One driver of growth in institutional adoption has been the increasing use of ETFs as an important means to express strategy, as opposed to tactics. In fact, more than half - 58 per cent - of institutions characterize their ETF holdings as strategic in nature, and nearly two-thirds (63 per cent) hold their ETF investments for a year or longer, the threshold normally considered a "strategic" investment.
"Institutional investors' use of ETFs has grown in absolute terms in recent years, but this survey shows that it has also grown in diversity and sophistication," said Warren Collier, Head of Canada iShares for BlackRock Canada. "The Canadian industry started using the funds largely for tactical applications, but since then we've seen strategic applications grow to the point where strategy now trumps tactics when it comes to ETF use. And where it gets really interesting is how sophisticated those applications have become."
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Seizing ETFs' diversity advantage
According to the Greenwich Associates study, the benefits of ETFs for institutional investors are varied and broad. Almost 85 per cent cite ease of use as a primary reason for investing in equity ETFs, while 80 per cent say they invested in ETFs because of the speed with which they can execute trades to gain diversified exposures. More than three-quarters cite liquidity, and more than two-thirds cite market access, low trading costs and/or attractive management fees, as primary reasons for using ETFs.
Institutional investors are realizing those benefits across a wide range of applications, both strategic and tactical. Two of the top three institutional uses of ETFs - international diversification, cited by 71 per cent of respondents, and core allocation, cited by 55 per cent - are strategic in nature. Institutions are, of course, continuing to use the funds for tactical applications, including portfolio adjustments (68 per cent), rebalancing (47 per cent), transition management (34 per cent) and interim beta (21 per cent). But they have also made ETFs increasingly important components in critical portfolio functions. Nearly half are using the funds in their liquidity management strategies, and two in five employ ETFs as part of risk management/overlay strategies.
Liquidity needs drive growth in Fixed Income ETFs
Given ETFs' origins as equity funds, it is perhaps not surprising that Canadian institutional use is most mature in equities. Nearly all of the respondents in the Greenwich Associates study invest in equity ETFs: Close to two-thirds invest in U.S. and international funds, and more than half invest in domestic ETFs. Yet they are also taking advantage of the diversity of asset classes today's ETF marketplace offers. For instance, more than 15 per cent of ETF investors use them to gain exposure to commodities, and close to 20 per cent employ them for access to real estate income trusts (REITs).
Nowhere is the adoption of non-equity ETFs more apparent than in fixed income. According to Greenwich Associates, close to two-thirds of institutional users invest in bond funds, including more than three-quarters of asset managers and insurance companies.
Canadian institutions continue to rely on fixed-income ETFs much more heavily than their counterparts in other countries. On average, Canadian institutional ETF users invest about a quarter (26 per cent) of total fixed-income assets in bond ETFs - more than three times the average allocation among counterpart European institutions, for example. One reason lies in the particularly large allocations by insurance companies, some of which hold 35 per cent of FI assets in ETFs.
Why are institutions turning to bond ETFs? The reasons vary, from ease-of-use and single-trade diversification (cited by 71 per cent of respondents) to low management fees (67 per cent) and trading costs compared to cash bonds (52 per cent). The prime motivator for using fixed-income ETFs, however, is liquidity, cited by more than 80 per cent of respondents.
According to Greenwich Associates, Canadian institutions have not experienced fixed income liquidity constraints to the same extent as their European and U.S. counterparts have, but the global landscape is clearly shifting in response to new, post-crisis bank capital requirements. Despite their already high level of bond ETF use, continuing concerns over liquidity could well drive even further adoption by Canadian institutions - many of which have been exposed to liquidity constraints when investing in international fixed income.
The Smart Beta solution
In the continuing low-rate environment, Canadian institutions have had to look beyond traditional securities for returns, and many are turning to smart beta ETFs as part of the solution. Nearly a third (31 per cent) of surveyed institutions invest in these funds - a level of smart beta use that continues to be higher Europe and just below the U.S. Furthermore, more than half of smart beta ETF users plan to increase their allocations to these funds in the next year.
The mix of Canadian institutional use of smart betas is evolving. As in last year's survey, multi-factor ETFs continue to be popular, used by half of smart beta ETF investors. Notably, however, half of smart beta investors - more than those who reported using minimum-volatility funds, which dominated institutional use last year - hold dividend/equity-income ETFs. That, according to Greenwich Associates, is a remarkable development - and a sign of institutions' need for new income sources - given that no investors in last year's survey were using dividend ETFs at all.
"The results of this year's Greenwich Associates study reflect the major trends that we see in our work with institutional investors on the ground," said iShares Canada's Collier. "On the one hand, institutions are becoming more familiar with the ever-growing range of ETF solutions available to them. On the other, institutional investors are continually finding new and sophisticated ways to apply those solutions, both in response to market forces and to express their strategic views. In an ever-changing investment environment, we expect those trends to continue going forward."
For its current Canadian ETF Study, Greenwich Associates interviewed 53 institutional investors, including 25 asset managers, 24 institutional funds and four insurance companies. The cohort of institutional funds, which includes public pension funds, corporate defined benefit pension funds and endowments/foundations, is the biggest sample size to date for the annual study. Most of the study participants are large institutional investors: 38 per cent have assets under management of more than $5 billion, 18 per cent manage more than $20 billion, and eight per cent manage more than $100 billion.
BlackRock is a global leader in investment management, risk management and advisory services for institutional and retail clients. At December 31, 2016, BlackRock's AUM was US$5.1 trillion. BlackRock helps clients around the world meet their goals and overcome challenges with a range of products that include separate accounts, mutual funds, iShares® (exchange-traded funds), and other pooled investment vehicles. BlackRock also offers risk management, advisory and enterprise investment system services to a broad base of institutional investors through BlackRock Solutions®. As of December 31, 2016, the firm had approximately 13,000 employees in more than 30 countries and a major presence in global markets, including North and South America, Europe, Asia, Australia and the Middle East and Africa. For additional information, please visit the Company's website at www.blackrock.com/ca / Twitter: @BlackRockCA / Blog: www.blackrockblog.com/can
iShares® is a global leader in exchange-traded funds (ETFs), with more than a decade of expertise and commitment to individual and institutional investors of all sizes. With over 700 funds globally across multiple asset classes and strategies and more than US$1 trillion in assets under management as of December 31, 2016, iShares helps clients around the world build the core of their portfolios, meet specific investment goals and implement market views. iShares funds are powered by the expert portfolio and risk management of BlackRock, trusted to manage more money than any other investment firm1.
1 Based on US$5.147 trillion in AUM as of 12/31/16
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