ETF allocations set for rapid growth, finds JP Morgan

Sep 17th, 2019 | By | Category: ETF and Index News

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Global fund selectors are expected to significantly ramp up ETF allocations in client portfolios over the next few years, according to research commissioned by JP Morgan Asset Management.

Bryon Lake, International Head of ETFs at JP Morgan Asset Management

Bryon Lake, Head of International ETFs at JP Morgan Asset Management.

The Global ETF Study 2019, which surveyed 240 professional buyers from a range of financial institutions across the United States, EMEA, Asia Pacific, and Latin America regions, found that ETFs currently account for 29% of investment portfolios globally, a notable increase from 22% of client portfolios recorded in 2016.

However, buyers have signaled their intention to accelerate ETF allocations to 39% within the next two to three years.

Bryon Lake, Head of International ETFs at JP Morgan Asset Management, commented, “Investors are becoming increasingly knowledgeable about ETFs and choosing to embrace the ETF vehicle which offers a number of unique benefits like daily liquidity, intraday trading, transparency, and real-time price monitoring. We believe we’re at the tipping point of the mass-market adoption of ETFs.

“ETFs are typically viewed as an extension of investment toolkits to help meet evolving asset allocation needs. And this is what we’re seeing play out in our survey findings in terms of rising ETF allocations.”

The survey highlighted some notable regional differences. The US continues to lead the charge with ETFs currently making up 41% of client portfolios allocations, expected to rise to 54% within three years. More surprising, perhaps, is that Latin America stands ahead of EMEA and Asia Pacific in terms of ETF usage, with allocations at 35% compared to 25%, and 23% for EMEA and Asia Pacific respectively, rising to 43%, 34% and 33%, respectively, in the next two to three years.

The survey also identifies potential drivers behind the growth in ETF allocations. When asked what they regarded as the biggest motivation for investing in ETFs, fees and costs came out on top, having been selected by 83% of fund buyers, followed by trading flexibility (65%) and transparency of holdings (40%). The continual shift towards passive investing was selected by less than a quarter (23%) of survey respondents.

On the subject of fees and costs, when asked to select their key investment objectives with respect to ETFs, cost control was cited by 62% of survey respondents. Interestingly, on a regional basis, cost control was cited as a key objective by 80% in the US, compared to only 38% in Asia Pacific. After cost control, liquidity, ease of trading and diversification were each seen as key investment objectives by around 50% of global professional buyers.

Equity ETFs remain the most popular asset class for professional investors with a 55% share of portfolios; however, the study also found that fixed income ETFs, alternative ETFs, and multi-asset ETFs are expected to attract significant capital over the coming years.

“Early ETF adoption was typically geared towards getting equity exposure but today, as the market matures, we’re seeing investors embracing fixed income ETFs at an equally fast pace,” said Lake. “Investors cite they want simplicity, transparency, and diversification which isn’t always possible when investing in global bond markets directly. We believe fixed income ETFs have the potential to be transcendent for investors and anticipate they’ll form a larger component of client portfolios within the next decade.”

When asked about their strategic use of ETFs, nearly half of respondents cited that they use ETFs for long-term investing in comparison to just over a third (35%) who said they use ETFs for short-term investing.

The study also noted significant appetite amongst investors for development within the actively managed ETF sphere.

Lake said, “What’s more, we’re finding many investors are increasingly banging the drum for actively managed ETFs. They’re looking for actively managed strategies that can be delivered through the benefit-rich ETF wrapper. This is the kind of innovation investors are now demanding.”

This particular finding echoes research conducted by financial data provider Broadridge Financial Solutions, which found that advisors in the US were increasingly interested in the concept of actively managed, non-transparent ETFs, such as Precidian’s ‘ActiveShares’ structure.

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