ETF Growth Spurred by Rising Institutional Usage

Supporting the ongoing growth in demand for ETFs among institutional investors, the ETF investment tool is being viewed as a new class of financial instrument, a number of smart beta ETFs have risen to meet challenges in institutional investors’ portfolios, notably in multi-asset funds, and bond adoption is quickly gaining on equity ETF demand.

About 52% of institutions that use derivatives to access beta indicated they have replaced an existing derivatives position with an ETF in the past year and one-third of institutions plan do so in the next year.

A number of institutions are looking into innovative ETF exposure through smart beta or alternative index-based strategies to navigate the changing market conditions, such as a low rate environment and rising market volatility. About 37% of institutional ETF users invest in smart beta ETFs as of the end of 2016, compared to 31% in 2015. Of those currently investing in smart beta ETFs, 44% expect to raise allocations to the various strategies in the next year.

Around 52% of asset managers use ETFs as part of multi-asset funds managed for clients, compared to 35% of asset managers employing ETFs in these funds in 2015.

Assets in bond ETFs expanded by almost 26%, compared to the 18% growth in U.S. equity ETFs, and the bond ETF space has much more room to grow. Along with the 38% of current bond ETF institutional users expecting to increase allocations, 17% of current non-users are considering investing in the funds in the year ahead.

Lastly, previous impediments that kept institutional investors away from the ETF space are giving way. For example, fewer institutions are concerned about ETF liquidity and expenses. Furthermore, the number of restrictions is falling with only 19% of non-users saying they were prevented from investing in fixed-income ETFs by internal investment guideline restrictions, compared to almost a quarter of non-users back in 2015.

For more information on ETF usage, visit our ETF performance reports category.