Institutional investors use ETFs in so many ways that it is increasingly important to pick the right one for the job. According to a global survey conducted by Institutional Investor, 65%1 of institutional investors planned to increase their use of ETFs during 2021. With that increased use of ETFs, investors can be looking to nimbly manage their portfolios, increase liquidity, and to realize greater time and cost efficiencies.
If that sounds like a tall order, it’s exactly ETFs’ ability to help fill those needs and many others that has made them so indispensable to institutional investors. Such reliance, however, places a greater emphasis on picking the right ETF for a given scenario.
What investors look for in ETFs
Perhaps recognizing that institutional investors have a need for advanced ETF analytics, asset managers and broker-dealers have developed tools that allow for investment vehicle comparison across a variety of metrics.
When it comes to evaluating ETFs, 60% or more of institutional investors and asset managers use each of three sources of information asked about in the survey: Bloomberg or a similar data platform (64%); tools provided by asset managers (62%); and broker-dealer analysis tools (60%).2
“We use a number of tools – but we also rely on the provider of ETFs to a great extent. They have a lot of analytics in terms of trading activity, flows, and underlying liquidity of the asset class. So, we take a holistic view, and we try to incorporate as many sources as possible,” said a senior analyst at one asset manager who was interviewed as part of the survey (“Managing Market Volatility in 2021: What Institutional Investors Did in 2020 – and What They Learned.”)
In the survey report, it is clear that value-add from ETF providers – whether in the form of services or tools – is essential to asset managers and institutional investors. In short, there are big expectations around what services institutional investors find valuable – and likely expect – from an ETF provider.
Viewed in the context that 62% of respondents use tools provided by asset managers to evaluate ETFs, the importance of value-added services is further magnified. Portfolio construction expertise is considered highly desirable by nearly 7 in 10 institutional investors, and an effective client service team, market insights, and portfolio modeling and trading tools are also on the wish list for at least half of institutional investors.2
Benchmark index also critical to ETF selection
The lion’s share of AUM goes to a small number of the roughly 7,000 ETFs available globally – indeed, the largest 20 ETFs hold 55% of the assets of the top 100 ETFs.3 With so many investors planning to increase their use of ETFs amid expectations of prolonged volatility, an ETF’s benchmark index is one of the most important considerations in the ETF selection process.
The index an ETF seeks to track can be significant to institutional investors for numerous reasons – 53%4 say the benchmark index is among the most important criteria when choosing among ETFs, followed by ETF providers’ brand and market position, management fees and transaction costs, historical performance, and several other qualities.
It is not unexpected that in a global survey three of the largest index providers are preferred as benchmarks: MSCI, S&P, and FTSE Russell are preferred for equity investments both in allocators’ home markets and when they invest globally, and for factor-based and ESG/sustainable strategies.1
Download the report Managing Market Volatility in 2021: What institutional investors did in 2020 – and what they learned.
1 Institutional Investor, Managing Market Volatility in 2020, January 2021. Based on 766 respondents. Usage figures comes from a global survey of institutional investment decision makers at insurers, endowments, family offices, foundations, pensions, and asset management firms surveyed in Q3, 2020.
2 Institutional Investor, Managing Market Volatility in 2020, January 2021. Based on 762 respondents.
3 According to January 13, 2021 data in the ETF Database, which publishes data on the use of ETFs. https://etfdb.com/compare/market-cap/
4 Institutional Investor, Managing Market Volatility in 2020, January 2021. Based on 762 respondents
FOR U.S. INSTITUTIONAL INVESTOR USE ONLY.
Carefully consider the Funds’ investment objectives, risk factors, and charges and expenses before investing. This and other information can be found in the Funds’ prospectuses or, if available, the summary prospectuses which may be obtained by visiting www.iShares.com or www.blackrock.com. Read the prospectus carefully before investing.
Investing involves risk, including possible loss of principal.
International investing involves risks, including risks related to foreign currency, limited liquidity, less government regulation and the possibility of substantial volatility due to adverse political, economic or other developments. These risks often are heightened for investments in emerging/developing markets and in concentrations of single countries. Funds that concentrate investments in specific industries, sectors, markets or asset classes may underperform or be more volatile than other industries, sectors, markets or asset classes and the general securities market. Transactions in shares of ETFs may result in brokerage commissions and will generate tax consequences. All regulated investment companies are obliged to distribute portfolio gains to shareholders. There can be no assurance that an active trading market for shares of an ETF will develop or be maintained.
A fund’s environmental, social and governance (“ESG”) investment strategy limits the types and number of investment opportunities available to the fund and, as a result, the fund may underperform other funds that do not have an ESG focus. A fund’s ESG investment strategy may result in the fund investing in securities or industry sectors that underperform the market as a whole or underperform other funds screened for ESG standards. In addition, companies selected by the index provider may not exhibit positive or favorable ESG characteristics.
There can be no assurance that performance will be enhanced or risk will be reduced for funds that seek to provide exposure to certain quantitative investment characteristics (“factors”). Exposure to such investment factors may detract from performance in some market environments, perhaps for extended periods. In such circumstances, a fund may seek to maintain exposure to the targeted investment factors and not adjust to target different factors, which could result in losses.
This information should not be relied upon as research, investment advice, or a recommendation regarding any products, strategies, or any security in particular. This material is strictly for illustrative, educational, or informational purposes and is subject to change.
The study was sponsored by BlackRock. BlackRock is not affiliated with Institutional Investor or any of their affiliates.
Prepared by BlackRock Investments, LLC, member FINRA.
iSHARES and BLACKROCK are trademarks of BlackRock, Inc., or its subsidiaries in the United States and elsewhere. All other marks are the property of their respective owners.
iCRMH0122U/S-1978849
