Institutional Investors Increasing ETF Usage

Mirroring the growing sentiment in the U.S., institutional investors in Canada are also embracing exchange traded funds and are expecting to increase allocations to the investment vehicle in the years ahead.

According to a Greenwich Associates study, titled Versatility Fuels ETF Growth in Canadian Institutional Portfolios, the share of Canadian institutional funds using ETFs increased to 12% in 2012 from 11% in 2011. Looking at institutional funds with over $1 billion in assets under managements, 21% of larger institutional funds utilized ETFs in 2012, compared to 15% in 2011. [More Institutional Investors Seen Using ETFs]

“Given the simplicity and flexibility of exchange traded funds, we’re not surprised that institutional investors are turning to ETFs more regularly to achieve their investment goals,” Greg Walker, Managing Director, Head of iShares Institutional Business, BlackRock Canada, said in a press release. “As indicated in the Greenwich survey, institutional use of ETFs is on the rise in Canada as institutional funds, investment managers and insurance companies discover new functions for these products within their investment portfolios.”

The study found that there are two reasons to increased use among institutional investors: 1) institutional investors are experimenting more with ETFs as the ETF universe expands. 2) once institutions use ETFs, they are more apt to pick up other fund products.

About 45% of Canadian institutional funds expect to increase allocations to ETFs by 2014, and no funds say they want to cut back on ETF usage. Additionally, asset managers using ETFs are also going to boost allocations to ETFs, with 31% showing an interest in moving more into ETFs.

Around 70% of institutions use ETFs for equity exposure, specifically for Canadian and U.S. stocks. About 83% of asset managers, though, use equity ETFs for international market exposure. On the fixed-income side, around 50% of institutional funds and 45% of investment managers use ETFs in domestic fixed income and 28% of respondents use ETFs for international fixed-income exposure.