Pension funds, insurers and asset managers are using exchange-traded funds (ETFs) for a wide range of purposes and holding them longer than commonly thought.
Research by Greenwich Associates into 120 European institutions, found five key developments in the use of ETFs.
1. Just over 70% of European asset managers who use ETFs employ them within their multi-asset funds. Over a third of asset managers use them within their equity funds, 52% say they use ETFs to invest in domestic bonds and 59% to access international bonds. Over half report that they are 'likely' or 'very likely' to manage an ETF-only product in the future.
2. Many institutions hold ETFs for a significant period of time. Only 6% of respondents using ETFs for tactical adjustments and 2% who use them for core allocations, hold ETFs for one month or less. Pension funds hold ETFs for an average of 29 months, the longest of the groups surveyed.
3. There are four common factors when choosing an ETF and cost is not always the top priority. When asked about the factors influencing ETF selection, all three types of institution said the fund's expense ratio, its liquidity or trading volume, its benchmark and its performance were the four most important aspects. However, for insurers, ETF liquidity is the most important factor, whilst for pension funds the ETF's expense ratio or cost is the top consideration.
4. European insurers are using ETFs to invest in international equity markets. Just over 60% of insurance companies using ETFs do so to achieve international diversification, and this is particularly true in equities. Seventy six per cent use ETFs to invest in international equities, compared with 57% to purchase domestic equities. Over half of insurance companies that use ETFs employ them to invest their surplus assets, with a third using them to invest their reserve assets.
5. Pension funds are more likely to be strategic users of ETFs. As with insurers, many pension funds use ETFs to achieve international diversification (69%). Nearly 90% of pension fund ETF users surveyed use ETFs in international equities, nearly three times as many as those using them for domestic stocks (30%).
The study was sponsored by BlackRock, the owner of ETF provider iShares, and is called ETFs: Broad Usage Increases Amongst European Institutional Investors.
Leen Meijaard, head of Europe, Middle East and Africa sales at iShares, says: "We're confident ETFs will form an ever greater part of the mix as the European ETF industry continues to grow at a record pace, as we saw in 2014."
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