Use of exchange-traded funds (ETFs) among European institutional investors continues to grow, driven by both tactical and strategic functions and by the access to new markets, according to an annual survey from Greenwich Associates.1
The average ETF allocation among institutions participating in the 2017 European Exchange-Traded Funds Study increased to 10.3% of total assets, from 7.7% in 2016. That compares with 21% of total assets for US investors.2
Investors are turning to ETFs to gain traditional exposure to markets and for tactical or transitional tasks, the survey’s authors said. The funds are also increasingly being employed in active investment decisions thanks to innovative indexing products. Key product drivers are those tracking factor-based strategies in equities and vehicles covering fixed income and commodities.
Passive investing has grown across regions in recent years as investors search for low-cost and versatile investment platforms. U.S. investors poured $470 billion into passive equity funds in 2017, and withdrew $175 billion from actively managed equity funds, according to Morningstar.3 In Europe, equity index funds collected $103 billion, more than triple the $33 billion lured by active funds.
“We have seen a significant shift from active into passive over the past few years,” Matteo Andreetto, STOXX chief executive officer, said in a Bloomberg TV interview on May 24. He forecast assets invested in exchange-traded products including ETFs will reach $15 trillion by 2025, from just under $5 trillion currently.4
“If you really try to segment the market, every single layer of benchmarking is growing at significant rates,” said Andreetto.
Outlook for higher allocations in equities
Almost 40% of European institutions currently investing in equity ETFs plan to add to allocations in the coming year, the Greenwich Associates survey found. That’s an increase from a year ago, when just under one third of participants said they were planning to boost allocations.
“Institutions are integrating ETFs more deeply into their investment processes and strategies,” said Andrew McCollum, managing director at the Greenwich, Connecticut-based research firm. Greenwich Associates has forecast that ETFs will attract $300 billion in flows from institutional investors globally each year by 2020.
The survey showed that institutions are attracted to equity ETFs for different reasons. Top among them are ETFs’ ease of use, market access, speed of execution, liquidity and low cost.
Smart beta gains in popularity
The share of institutional investors who invest in non-market-cap weighted ETFs, which seek to exploit specific sources of premia, continues to grow. Use of so-called smart beta funds rose to 31%, from 26% in 2016 and 21% in 2015.
Almost three quarters of those users invest in minimum-volatility ETFs, while nearly two thirds invest in both single- and multi-factor funds. They are followed in preference by vehicles tracking equal-weighted and dividend/income strategies.
A year earlier, dividend/income was the third-favored smart-beta strategy.
“Given the increasing popularity of factor investing worldwide, demand for smart-beta ETFs is expected to continue growing in both retail and institutional portfolios,” McCollum said.
The pace of ETF adoption is, unsurprisingly, larger in markets outside of equities. Among current ETF users in the survey, those employing ETFs in fixed income jumped to 65% from 48% in 2016, as more investors replaced cash bonds.
A quarter of fixed-income ETF users polled said they plan to increase holdings in the coming year, compared with 10% who said they may reduce them.
Use of commodities ETFs climbed to 33% of institutions in the survey, up from 20% in 2016. A total of 23% of respondents invest in REITs ETFs, up from 20%. The share of European asset managers buying ETFs for use in multi-asset funds increased to approximately 80% from 63% in 2016, the survey showed.
Greenwich Associates interviewed a total of 125 institutional funds, asset managers and insurers between October and December 2017 for the survey’s fourth edition.
1 ‘European Institutions Explore New Asset Classes with ETFs,’ Greenwich Associates, May 2018.
2 ‘Active Strategies, Indexing and the Rise of ETFs,’ Greenwich Associates, Sep. 7, 2017.
3 ‘2017 Global Asset Flows Report,’ Morningstar, May 16, 2018.
4 ETFGI data.