A larger number of European institutional investors are using ETFs than ever before, as investors seek new means to manage volatility associated with market events such as Brexit and the US election, according to a report by Greenwich Associates.
Market volatility due to Brexit caused a jump in the number of institutional investors using ETFs for risk management.
The study of 132 institutional investors in Europe, commissioned by Blackrock, revealed that insurers are now the most common users of ETFs among European institutions with 89% of those surveyed indicating current use of these funds, up from 68% last year. Insurers now surpass asset managers in terms of ETF use with 85% indicating current usage, compared to 72% in 2015. Nearly 60% of pension funds now use ETFs, up from 40% last year.
Fergus Slinger, Co-Head of iShares Sales EMEA at BlackRock said, “ETFs are being used by a more diverse range of investors than ever before. Institutions are adjusting their investment approach in response to changing market dynamics, including central bank activity, increased market volatility around events such as Brexit and the US election.
“ETFs are a highly effective tool that allows investors to navigate these challenges and to help generate risk adjusted returns as efficiently as possible. This has led to widespread use of ETFs initially focusing on equity portfolios, and we are seeing it evolve into a standard component of institutional fixed income investing. In 2017 we also observe a shift into commodity ETFs as real assets start to benefit from better growth and anticipated reflation.”
Market volatility was listed as a major concern for those investors surveyed with 36% of institutions stating risk management or management overlay strategies were a key reason for their ETF use, up from 28% in 2015. Several respondents noted this increase was in direct response to managing increased volatility associated with Brexit.
The report also found that fixed income liquidity was also a key driver of ETF adoption. In 2016, the share of institutional investors using ETFs for liquidity management reached 45%, up from 36% in 2015. Managing liquidity is likely to be the driving factor in using bond ETFs for first time users, with one in ten institutions expecting to use these funds for the first time in 2017. This comes at a time when investors have reported reductions in fixed income market liquidity as a result of the Basel III bank capital requirements.
In the smart beta space, three-quarters of current smart beta users plan to increase their allocations in 2017 due to expectations of a continued low interest rate environment and the prospects of increased volatility, up from 57% in 2016. Asset managers are most likely to increase their allocation with four in five stating they intend to do so.
The study also revealed that institutional investors are also using ETFs to replace other investment vehicles, with one-third of respondents stating they had replaced existing futures positions with an ETF in 2016 and half expecting to do the same in 2017.