The persistent low-interest-rate environment has professional money managers looking for ways to get better yields. Aside from alternative assets, it turns out managers are turning to ETFs that promise increased returns, diversification, and yields.
US-based consultancy firm Greenwich Associates and BlackRock have released an industry report entitled ETFs: “Active” Tools for Institutional Portfolio Managers
. The study polled 53 Canadian institutional investors, which included funds, asset managers, and insurers, according to the Globe and Mail
“ETFs are as common as stocks, bonds and derivatives in these institutional portfolios now,” Warren Collier, head of Canada iShares for BlackRock Canada, told the publication. He noted that this growth follows years of raising investor awareness on how ETFs can be used to meet certain goals or address selected problems.
Canadian institutions investing in ETFs have an average of 16% of their total assets in the funds, with 90% invested in equity ETFs and 60% in bond ETFs. “The cost of getting access to fixed-income securities directly is going up,” Collier said. “We expect to see [bond ETFs] continue to grow quickly.”
While half of the poll respondents switched from a derivatives product to an ETF for simplicity’s sake, nearly a third said they are using smart beta funds, which blend active and passive investment styles by using a variety of investment weighting strategies. “[T]here are more ETF products with interesting uses, which provides easier access to areas I might not have had otherwise,” said one respondent, who works at an asset management firm.
None of the funds polled last year were invested in dividend/equity-income ETFs, but around half of this year’s respondents reported having exposure to these funds. “The uptick in demand for dividend/equity-income ETFs suggest that institutions’ concerns about market volatility were matched by their need for returns in the low-rate environment that persisted in 2016,” said the study.
Institutional investors with exposure to ETFs plan to increase their bets in these vehicles next year, and none had plans to cut back. Those with no ETF exposure cited “concerns about liquidity, expenses and investment guideline restrictions that limit or prohibit investment,” though the report said some of those issues are dying down.
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