In a market marred by heightened volatility, more traders are turning to ETFs as a go-to investment tool to quickly go in and out of the market.
According to a BlackRock and Greenwich Associates study, the increased market turbulence has triggered greater tactical usage of ETFs among institutional traders, Bloomberg reports. Specifically, the study found that large institutional investors allocated an average 25% of assets to ETFs in 2018, compared to 19% a year earlier.
The report found that geopolitical events like trade wars, recession risks and rising interest rates remained at the forefront of institutional investors’ mind coming into 2019.
Using ETFs for tactical purposes
Due to the ETFs’ transparency into day-to-day holdings and their ability to trade on an exchange, many have turned to the investment vehicle to quickly adjust positions to counter these sudden market threats. More managers are utilizing ETFs for tactical purposes and risk management, according to the survey.
“As institutions implement the defensive portfolio strategies they are using in response to these risks, they are employing ETFs at a far greater rate than ever before,” Andrew McCollum, a managing director at Greenwich Associates, said in the report.
Looking at the types of investments these institutions are accessing, about 60% of the study participants revealed they invested in bond ETFs, compared to just 20% in 2017. Three of every four respondents also use or are considering factor-based or smart beta ETFs, compared to 44% claiming they used these types of rules-based index funds in 2017.
“As market volatility set in, institutions like insurers and pension plans were much more intentional about seeking factor strategies,” Holly Framsted, head of U.S. smart beta for BlackRock’s ETF business, told Bloomberg. “More recently we’re seeing investors evolve ETF applications in more sophisticated ways to actively express market views or to tilt toward precise factor exposures.”
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