Rapid shifts in the economic landscape are signaling an end to the relative stability most investors enjoyed for more than a decade. Not long after the Covid-19 pandemic helped to end the longest bull market in US history, inflation surged and war in Ukraine brought new uncertainty to global markets. These factors and others continue to fuel the foreboding forecast voiced by a growing chorus of analysts: Investors should expect volatility, and likely recession, to be prominent elements in the global economic climate through 2023 and beyond.
Accordingly, institutional allocators and their managers may need to significantly improve the flexibility and resiliency of their portfolio strategies. And new research shows many institutional investors are increasingly using ETFs to achieve this.
ETF use is on the rise
In the first half of 2022, Institutional Investor’s Custom Research Lab surveyed 759 institutional investment decision makers located across the world at pensions, endowments, foundations, insurance companies, family offices, and asset management firms*. The survey confirmed that these professionals are tapping ETFs more frequently to pursue their goals. More than one-third (39%) say they’ll use ETFs more during the next 18 months, while another 30% will continue to use ETFs at the same rate they currently do; only 25% plan to decrease their use (n=758). The survey also revealed their motivations for increasing their use of ETFs going forward.
“As an active manager constructing portfolios across a wide range of risk profiles, we have long been fans of the transparency and risk-mitigating diversification benefits offered by ETFs. In our view, the world is now potentially entering a new long-term macro regime characterized by cyclical bouts of elevated inflation and interest rate volatility,” says Columbus Macro CIO Brian Wright. “Using low-cost ETFs to quantify and manage equity factor exposures and fixed income duration risks may prove very beneficial in navigating what could be a persistently challenging and volatile environment for financial markets.”
ETFs offer far more cost savings
It’s clear that institutional investors want to decrease their costs; this emerged as a theme throughout the survey. In fact, 43% of institutional investors say controlling transaction costs is their top portfolio objective, prioritizing it along with risk management (n=758). This reality is certainly helping to drive the popularity of ETFs among institutional investors, given their cost-effectiveness.
“For rebalancing purposes, we like ETFs as low-cost options that closely track macroeconomic trends – and for diversification,” says a head of alternative investments at a family office with $7.5 billion AUM, one of 12 institutional investment decision makers interviewed for the survey report. “[And] because of the way they are structured ETFs [can] offer tax advantages, specifically around capital gains.”
However, cost savings is just one top motivation institutional investors cite for using ETFs; they also repeatedly mention others. Here are key examples from the survey:
- When performing strategic allocations, the top two reasons institutional investors use ETFs are their flexibility (71%) and alignment with benchmarks (54%, n=400).
- In making tactical allocations, the top two reasons institutional investors use ETFs are their alignment with benchmarks and low transaction and management fees (both 52%, n=368).
- When rebalancing their portfolios, those surveyed like ETFs for the same reasons (alignment with benchmarks and low transaction and management fees; both 50%, n=372).
- Institutional investors with multi-asset strategies say ETFs are useful for gaining quick access to assets aligned with benchmarks (53%), followed by achieving cost efficiencies (49%), and meeting risk-return requirements (48%, n=348).
- As part of their fixed income and capital preservation strategies, a clear majority (61%) of institutional investors surveyed use bond ETFs to achieve fast, easy access and exposure to markets (n=677).
Quicker market access, greater agility
The flexibility ETFs allow is becoming a more imperative need for institutional investors as volatility increases. “We’re active managers, so the value of ETFs in our multi-asset portfolios is tactical asset allocation – the ability to move money across growth versus value, U.S. versus international versus emerging, across sectors and fixed income,” says a head of portfolio management at an asset manager/private bank with $1.6 trillion AUM.
“ETFs are complementary to both alpha seeking strategies and tactical asset allocation,” adds a head of investment strategy at an asset manager with $540 billion AUM. He also notes that his firm will be using ETFs more frequently in the future due to increasing demands for transparency and the large fees charged by some mutual funds. “I’m shocked by upfront fees on some mutual funds that are still available on leading platforms,” he continues. “You can buy an ETF that tracks the same benchmark.”
* Institutional Investor, Rising to the Challenge of A Dynamic Market: Institutional investors Respond to Uncertainty in 2022, June 2022. 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 Q1, 2022. This study was sponsored by BlackRock. BlackRock is not affiliated with Institutional Investor, any of the responding firms or any of their affiliates.
FOR INSTITUTIONAL USE ONLY – NOT FOR PUBLIC DISTRIBUTION
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