Institutional investors have their sights set on ETFs, potentially funneling billions of dollars into the growing investment vehicle in the years ahead.
According to the 8th annual Greenwich Associates U.S. ETF Study, institutional investment demand for ETFs will continue to grow for 2018 and into 2019 as institutional investors prep their portfolios for a return to volatility and the shifting interest rate environment.
“As U.S. institutional investors ready their portfolios for the return of volatility and the end of the ‘Goldilocks’ market, they are increasing their investments in exchange-traded funds and integrating ETFs more deeply into their portfolio management and investment strategies,” according to Greenwich Associates. “Over the past 12 months, U.S. institutions have become increasingly concerned about the risks of market volatility in the face of a rising rate environment and the many unknown variables associated with the shift to a new and unprecedented era of ‘quantitative tightening.'”
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Consequently, a growing number of institutions are utilizing smart beta ETFs as way to help hedge portfolios against the volatility, notably factor-based or multi-factor investment strategies that incorporate academically proven market factors to limit downside risks while maintaining upside potential.
“ETFs provide a liquid vehicle to express a more timely view of a particular sector of the market or an opportunity that’s available or to decrease risk temporarily in the portfolios,” one study participant told Greenwich Associates. “It’s just a great vehicle for that.”
The Managing Director of Financial Risk Management for a U.S. asset management firm added, “The transition from high risk to low risk in a nimble way is very important, and ETFs are great for that.”
Investors Look to ETFs Like Never Before
Consequently, more are looking into ETFs alongside individual stocks and bonds and derivatives for use in a wide variety of active and passive investment strategies.
Further supporting the greater usage of ETFs among institutions, many institutions have altered their investment guidelines to remove provisions restricting exposure to ETFs. These changes are being made because institutions believe ETFs can help enhance portfolio liquidity and reduce costs.
“We are a top-down manager, so we like to choose an asset class and go down from there,” the Head of Trading for a U.S. asset manager told Greenwich Associates. “The nice thing about ETFs is that it doesn’t cause us to be an equity stock picker. It allows us to be simply an asset class picker.”
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