The exchange traded fund investment tool has been a hit with investors, accumulating $2.2 trillion in assets under management, and the ETF industry may continue to find traction among institutions.
According to recent Greenwich Associates research on institutional ETF adoption, ETFs will enjoy $300 billion in annual flows by the year 2020 as institutional investors continue to adopt the easy-to-use tool.
Related: ETFs Are a Hit Among Financial Advisors
Greenwich Associates’ study was based on 408 global institutional investors, including 137 institutional funds, 141 asset managers, 63 insurance companies, 20 investment consultants and 47 registered investment advisors.
The study revealed that institutions are developing new ways to capitalize on market moves through the funds by investing across various asset classes. For instance, asset managers are using ETFs to augment core positions, to replace derivatives and to find sources of liquidity.
[related_stories]Institutions are also showing greater interest toward smart-beta ETF strategies that implement active styles in a passive index-based wrapper.
Related: Institutional Smart-Beta ETF Adoption is Quickly Rising
Greenwich Associates pointed to five factors that will continue to support institutional flows: First off, the broadening use of ETFs will drive $132 billion in new demand in five years’ time. The shift toward ETFs to obtain core exposure and hit strategic, long-term goals will bring in $42 billion in annual flows.
Attractive liquidity will also fuel demand for fixed-income-related ETFs, driving $68 billion in new annual flows. ETFs as an alternative to derivatives will generate $28 billion in flows annually. Lastly, innovative strategies, like smart-beta ETFs, will continue to attract $25 billion in annual flows.
Adoption in the U.S. has been notably strong. Institutions have allocated an average 20% of assets to ETFs, according to the research note, compared to 9% among European investors and 2% in Asia.
For more information on the ETF industry, visit our ETF performance reports category.