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.”