Institutional investors get in on ETF act
No longer just strategy of retail asset collectors
Exchange-traded funds have proven a hit with retail investors, but they are increasingly becoming part of the game plan for institutional investors as well.
And not just as a vehicle for short- term tactical allocations.
“I think the biggest trend that we’re following is the increasingly strategic application of ETFs in institutional portfolios,” said Christopher Dunn, vice- president, investment management, at Greenwich Associates. “For example, the time in which those investments are in place has extended considerably, so it’s kind of become core to their i nvestment strategy, is the application of ETFs.”
In some cases, the funds are even “supplanting” traditional core exposures, particularly domestic equities, Dunn said, as the liquidity and lower costs of ETFs can present an attractive proposition.
( Insurer Sun Life Financial Inc., for example, said in February that approximately 58 per cent of its “well diversified” equity portfolio was invested in ETFs as of the end of 2017.)
Institutional i nvestors have also been drawn into ETFs — at least in part — because of their interest in fixed-income funds.
“I think the biggest growth potential in recent years has actually been on the fixed- income side," said David Kletz, an analyst and vice president, portfolio manager, at Forstrong Global Asset Management Inc. “A bond ETF provides instant diversification over a wide number of bonds, which obviously helps mitigate whatever risks inherent there are. That’s been a huge factor pushing ETFs into institutional usage.”
And institutional investors have a “very large potential” to further increase asset accumulation for ETFs, Kletz added.
“Institutions have been using ETFs … but in past years they were primarily used for shorter-term tasks," he said. “Nowadays, a lot of institutions have begun using ETFs for longer- term purposes, like strategic asset allocation, and then gaining the immediate benefit of the diversification and liquidity attributes.”
ETFs that invest in accordance with ESG criteria can also serve as a way to align an institution with a social cause, while still pursuing profit.
Last week, the Ontario Municipal Employees’ Retirement System pension plan announced it would invest $100 million into a Royal Bank of Canada fund that is looking for gender diversity in Canadian companies.
“OMERS was founded on the belief that ‘ together, we are stronger’," said Satish Rai, chief investment officer of capital markets at OMERS, in a release. “That belief continues to guide us in our inclusion and diversity efforts.”
With volatility returning to markets, and central banks signalling that rate hikes will eventually come, investors have also been looking at ETFs to provide them with active management.
“If you’re active, then the manager has more capabil- ity to be able to manage the duration exposure over time, along with the pace of the growth in interest rates,” said Vlad Tasevski, vicepresident at Purpose Investments Inc.
Canadian investors apparently did not let volatile markets in February deter them, with a March 2 note from National Bank Financial saying that Canadian ETF assets stood at $150 billion.
“Canadian ETF inflows did not encounter any obstacles f rom the market sell-off that took place south of the border in early February,” the firm said. “Although just two months have passed since the start of the year, year- t o- date i nflows are slightly outpacing the same period from 2017.”
BlackRock CEO Larr y Fink even noted the broader appeal of ETFs in a January earnings release that indicated the company’s iShares ETFs generated US$ 245 billion in full- year net inflows, “as an increasingly diverse set of institutional and retail clients are using ETFs for asset allocation and alpha generation.”