Why more institutional investors are leveraging ETFs

In Canada especially, more institutional investors are integrating ETFs into their large portfolios as an effective way of executing investment strategies

Why more institutional investors are leveraging ETFs

There are so many reasons, but single trade diversification, ease of use, quick access and liquidity lead the way for an increasing number of global institutions being drawn to ETFs. In Canada especially, more institutional investors are integrating ETFs into their large portfolios as an effective way of executing investment strategies.

A recent Risk.net study commissioned by Jane Street revealed that institutions are seeing ETFs as a more liquid vehicle across all asset classes, giving rise to the continuous growth in the size of the average ETF trade with nearly one in four global institutions executing a trade of over $100m1.

A separate study by Greenwich Associates showed that Canadian institutions are adopting ETFs as a tool to obtain "core" exposures as an essential part of their investment strategies.

“There's definitely been an increase in allocations" said Justin Oliver, BMO Global Asset Management Director, Institutional for Exchange-Traded Funds. "It really comes down to the industry, which continues to scale products within the market. An institutional grade product, by estimate, would have around $1bn of assets trade over 500,000 shares a day and have a healthy options market.3 Typically, these features will spur interest within the institutional crowd because of the versatility of use.”

BMO GAM has a wide range of ETFs and, for Oliver, these products are giving institutions the versatility they need to achieve the results they want efficiently, and with precision. Furthermore, he explained, a growing awareness and education around the many benefits of ETF use is making them more accepted as a standard need for a wholesome portfolio achieving maximum efficiency. 

"In a market where we are seeing fixed-income bonds becoming a lot more illiquid, demand for fixed income ETFs has been steadily rising,” Oliver said ETFs offer a really good opportunity to get access to an aggregate bond or sub- index quickly. In many cases ETF spreads can be tighter than the underlying market.”

In his view, the ETF space allows institutions to reach not-readily accessible markets without paying large intermediary fees. Oliver highlights BMO GAM's Laddered Preferred Share Index ETF (ZPR): in recent years, it has proved itself to be a strong institutional grade product with over $2bn in assets. It trades over 500,000 shares a day and has a yield of 4.5%.  This is a similar case for BMO High Yield US Corporate Bond Index ETF (ZJK), which has well over $1bn dollars in assets, and the BMO High Yield US Corporate Bond Hedged to CAD Index ETF (ZHY) that allow a manager to asset allocate into a sleeve of an asset class that is needed for many broad targeted portfolios.  These ETFs have over 900 underlying holdings to give an idea of just how much diversity any investor can get in a $20 dollar ETF unit.2

"We are seeing institutions using ZHY, ZPR and the aggregate fixed income market with ZAG to single trade diversify instantly into or out of spaces that are very difficult to do so " he said.

“Any institution, advisor, or individual investor can now own the same ETFs that the largest hedge fund in the world, Bridgewater uses to get their emerging market or S&P 500 exposure”.

  1. Source; Risk Publications/risk.net, “ Institutional ETF trading Liquidity improving, trade sizes growing”, Pg 2, Q4 2018
  2. Source: Greenwich Associates, “Canadian Institutions Lead the Way in ETF Investing”, Pg. 15, Q2, 2018
  3. Source: BMO Asset Management Inc. All data as of Sept 30th , 2018


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