ETF allocations set to rise even further

Institutional investors cite their advantages and ability to support investment objectives, as well as future trends

ETF allocations set to rise even further

J.P. Morgan Asset Management has released its Global ETF Study 2019, which shines a light on investors’ attitudes and uses of ETFs as well as considerations in their present and future use.

The study draws on feedback from 240 institutional investors around the world — such as independent wealth managers, discretionary fund managers, and private banks — that are responsible for over US$14 trillion in assets under management.

Globally, respondents are expecting to allocate 39% of their portfolios to ETFs over the next two to three years, a significant increase from 22% three years ago and 29% today. Equity products are expected to take the lion’s share in portfolios as exposure is set to grow faster in the next two to three years (from 16% today to 21%) compared to other ETF asset classes (from 8% to 10% in bonds, 3% to 4% in alternatives, and 2% to 3% in multi-asset products).

Low cost and passive approaches win investors’ hearts
The top three reasons cited for using ETFs were cost control (identified by 62% of investors), liquidity (51%), and ease of trading (50%). In line with this, the top three advantages of the products according to respondents came from their associated fees/costs (83%), trading flexibility (65%), and transparency of their holdings (40%).

Read also: Track record tops global investors' ETF selection criteria

Passive approaches have proven to be popular, cited by 63% of respondents as their preferred investment approach, compared to just 28% for active. Capital growth strategies were favoured by a 59% majority, with just 19% pursuing hedging and 16% going with a neutral approach. When it comes to time horizons, respondents around the world slightly favour long-term investing (46%) over short-term (35%), though the preference for the short term was more pronounced among U.S. respondents (40%).

Considerations and risks
When it comes to trading ETFs, a majority of global respondents cited market volume (75%) and bid-ask spreads (60%) as critical considerations. U.S. respondents overwhelmingly expressed an emphasis on market volume (95%), and also put more weight on market impact compared to the global average (50% of U.S. respondents vs. 35% globally).

As for ETF investing risks, liquidity issues under a major bear market weighed most heavily on the minds of survey respondents worldwide (67%). The report said such concerns may be linked to greater use of automated trading systems, the rise of high-frequency trading, and other trends that impact market liquidity.

Moving toward themes and ESG
The survey also uncovered some interest in thematic ETFs.  In particular, investors were drawn by their promise of exposure to niche or subset markets (43%), the simplicity of their underlying concepts (35%), and potential return from long-term structural trends (34%).

When asked what types of ETFs their clients will be interested in over the next two to three years, 49% of respondents cited active equity ETFs. Another 38% named thematic ETFs, while 35% cited ESG ETFs.


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