ETF Trends
ETF Trends

Institutional investors may contribute to the exchange traded fund industry’s next growth spurt as large traders look to the cheap, easy-to-use investment vehicle to address volatility concerns and insource more assets.

Institutions have historically favored active management, but institutional investors are have been increasingly turning to smart-beta or factor-based ETFs, Todd Rosenbluth, S&P Capital IQ Director of ETF Research, wrote in a research note.

“Institutions are looking at smart beta in two main ways,” Daniel Gamba, managing director and head of BlackRock’s iShares Americas Institutional Business, told S&P Capital IQ. “The increased volatility in the equity markets has made institutional investors become more tactical and they can get exposure with lower risk. In addition, institutions are insourcing more assets.”

Gamba also noted that institutional investors are taking a closer look at factor-based ETF investments and reorganizing their businesses toward factors like value, size, quality, momentum and volatility.

Moreover, Rosenbluth noted the increased ETF usage among insurance companies.

“Insurance companies are using ETFs in their general accounts,” Gamba added. “Two years ago, usage in reserve assets was 6% but a study with Greenwich Associates showed that now 71% are doing so.”

The increased ETF adoption among insurance companies reveals that instead of outsourcing with active managers, the firms are utilizing factor investment strategies in their own portfolios.

Looking ahead, according to a recent Greenwich Associates Study, Institutional Investment in ETFs: Versatility Fuels Growth, U.S. institutional investors plan to increase their use of ETFs in 2016. [ETFs Finding More Fans Among Institutional Investors]

While institutional investors have been picking up ETFs, Gamba believes it is still the early stages of institutional ETF usage.

“There’s just 1% in asset management assets being devoted to ETFs and we think that percentage will increase,” Gamba said. “For example, over 40% of those multi-asset portfolios interviewed by Greenwich are using ETFs, using them to replace derivatives, futures or as a tool to add alpha to their portfolio. We will see more of it.”

Consequently, as institutions step into ETFs, all investors will enjoy increased volume and tighter spreads.

Max Chen contributed to this article.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.