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Canadian Asset Managers and Institutional Funds Are Broadening Their Use of ETFs and Embracing Them for Fixed-Income Funds: Greenwich Associates Report

August 19, 2014

TORONTO, ONTARIO--(Marketwired - Aug. 19, 2014) - Institutional investors across Canada are broadening the ways they use exchange traded funds and embracing more strategic applications for ETFs in their investment portfolios, according to a recent Greenwich Associates study. In its second year of fielding of Canadian-based institutional users of ETFs, sponsored by BlackRock Asset Management Limited (BlackRock Canada), the Greenwich Associates results found that 40 per cent of institutional funds and asset managers surveyed expect to increase their use of ETFs in the coming year - up from just above a third last year.

Overall, the Greenwich Associates study found that institutional usage of exchange-traded funds is growing, in part due to the increasing use of ETFs in fixed income and other asset classes beyond equities. Of those already regularly using ETFs in their existing portfolios, 40 per cent of Canadian institutions intend to increase allocations and move more assets to ETFs by 2015. Moreover, half of the institutions participating - and particularly asset managers, who actively manage money for institutional funds - say that their use of ETFs overall is strategic rather than tactical.

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"This is really a continuation of a trend we've been seeing develop for several years now," said Greg Walker, Managing Director, Head of iShares Institutional Business, BlackRock Canada. "Not only are institutional investors like pension funds, foundations and endowments realizing the benefits of ETFs, but increasingly asset managers are as well. It's more than a numbers game - institutions are using ETFs more, but also in more ways. And the growth in fixed-income ETFs is really remarkable."

As in last year's study, half of institutions say that their use of ETFs is strategic in nature, in part attributable to the wider and more diverse ETF product set. This is further evidenced by the growing use of fixed-income ETFs by institutions, who are realizing the benefits of the funds in terms of liquidity and cost transparency in an often-difficult-to-access bond marketplace.

Fixed Income Drives ETF Growth

While institutional investors most widely use ETFs in equity portfolios; in the study, 80% use the funds for domestic equity and 85% use them for U.S. equity exposure, this year's study revealed an increasing use of the funds for fixed income allocations. In fact, half of the institutions participating employ ETFs in fixed income, and more than 20% of those using bond ETFs began doing so less than two years ago. Among asset managers, 57% are now using ETFs in fixed income - up from only 45% just one year ago.

The most frequently cited benefits for institutions: ease of use and ease of access, as well as the high liquidity ETFs offer. In a low-yield environment, institutional investors are seeking new sources of yield and looking for better and more efficient ways to access the asset class in a shifting interest-rate environment. Coupled with their heavy usage of passive index strategies, institutions are increasingly turning to ETFs to achieve those efficiencies. In fact, more than a quarter of institutions now using ETFs in fixed income plan to increase allocations to bond ETFs in the coming year.

Remarkably, more institutions are using ETFs to gain exposure to similarly illiquid or hard-to-access asset classes. According to the study, 38% deploy ETFs in commodities and 27% use the funds in REITs.

From Tactical Tools to Strategic Elements

ETFs have long been used by institutional investors as tactical tools in manager transitions, portfolio rebalancing or cash equitization. Those remain important uses, as about two-thirds of institutional ETF users say they deploy ETFs to make "tactical adjustments" to portfolios. However, half of the institutions in the study say their use of ETFs is mainly strategic. Two-thirds of this group use ETFs to obtain passive exposures in the "core" components of core/satellite strategies, while other common strategic applications include portfolio completion, hedging and liquidity sleeves.

"As institutions become more familiar with the benefits and the range of ETFs available, they are also figuring out better ways to put the funds to use beyond tactical adjustments," said Walker. "One proof point for the increasing strategic deployment of ETFs is that more institutions are beginning to hold them for longer periods of time."

According to the study, asset managers holding ETFs longer than two years grew to 31% up from 24%.

Liquidity matters

While the uses of ETFs vary, institutional investors seem to agree on the most important criteria for ETF selection: liquidity and trading volume. More than three-quarters cited liquidity/trading volume as an important factor in selecting a fund, while 83% said they are concerned about the liquidity of funds in which they invest. The second most important criteria overall was cost, but asset managers are far more concerned with expenses than institutional funds are: 60% of asset managers cite cost as an important consideration, compared with just 17% of institutional funds.

Methodology

Between April and June 2014, Greenwich Associates conducted online and telephone interviews in Canada with 42 asset managers and six institutional funds (corporate pension funds, including corporate pensions of U.S. corporation subsidiaries; public/provincial pension funds; endowments; and foundations) that identified themselves as ETF users. The study was designed to track and uncover ETF usage trends.

About BlackRock

BlackRock is a leader in investment management, risk management and advisory services for institutional and retail clients worldwide. At June 30, 2014, BlackRock's AUM was $4.594 trillion. BlackRock helps clients meet their goals and overcome challenges with a range of products that include separate accounts, mutual funds, iShares(R) (exchange-traded funds), and other pooled investment vehicles. BlackRock also offers risk management, advisory and enterprise investment system services to a broad base of institutional investors through BlackRock Solutions(R). Headquartered in New York City, as of June 30, 2014, the firm had approximately 11,600 employees in more than 30 countries and a major presence in key global markets, including North and South America, Europe, Asia, Australia and the Middle East and Africa. For additional information, please visit the Company's website at www.blackrock.com.

About iShares ETFs

The iShares business is a global product leader in exchange traded funds with over 600 funds globally across equities, fixed income and commodities, which trade on 20 exchanges worldwide. The iShares funds are bought and sold like common stocks on securities exchanges. The iShares funds are attractive to many individual and institutional investors and financial intermediaries because of their relative low cost, tax efficiency and trading flexibility. Investors can purchase and sell securities through any brokerage firm, financial advisor, or online broker, and hold the funds in any type of brokerage account. The iShares customer base consists of the institutional segment of pension plans and fund managers, as well as the retail segment of financial advisors and individual investors.

iShares Funds are managed by BlackRock Asset Management Canada Limited. Commissions, trailing commissions, management fees and expenses all may be associated with investing in iShares Funds. Please read the relevant prospectus before investing. The funds are not guaranteed, their values change frequently and past performance may not be repeated. Tax, investment and all other decisions should be made, as appropriate, only with guidance from a qualified professional.

(C) 2014 BlackRock Asset Management Canada Limited. All rights reserved. iSHARES(R) and BLACKROCK(R) are registered trademarks of BlackRock, Inc., or its subsidiaries in the United States and elsewhere. Used with permission. iSC-1275-0814

FOR FURTHER INFORMATION PLEASE CONTACT: Contact for Media: Maeve Hannigan 416-643-4058 416-564-1540 (cell) Maeve.Hannigan@blackrock.com Source: BlackRock Asset Management Canada Limited (iShares)


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