Pension funds increasingly turning to ETFs, finds DWS

Jun 27th, 2019 | By | Category: ETF and Index News

Pension funds are increasingly turning to ETFs amid a general rise in the adoption of passive investments, according to research commissioned by asset manager and ETF issuer DWS.

Pension funds increasing ETF usage, finds DWS

Just over a quarter (26%) of pension funds said ETFs were their preferred passive investment tool.

Based on a survey of 127 pension funds globally by CREATE-Research, passive funds now account for 34% of pension assets, with 78% of respondents expecting that share to rise over the next three years.

Just over a quarter (26%) of pension funds said ETFs were their preferred investment tool, up from 23% the previous year. Though this is still some way behind traditional index funds (cited by 53% of respondents) and segregated accounts (34%).

The report notes that ETFs offer pension funds “an easy route into an asset class without having to pick individual funds or securities. Furthermore, they are seen as a cash equitisation vehicle that parks excess money that would otherwise languish in a low interest rate environment. They are also used to hedge or short the market.”

Passive funds are advancing into the core part of pension fund portfolios, leaving specialist or illiquid strategies to generate alpha. Two-thirds (66%) of survey respondents stated that passive investments are part of their ‘already mature’ portfolios.

According to the report, the key drivers of growing passive implementation at the core of portfolios are their lower costs, continuing superior performance over active funds, and ability to slice and dice the investment universe in search of new opportunities.

Within pension funds’ passive allocation, smart beta strategies are also advancing with over a quarter (26%) of passive users adopting a smart beta strategy. The report notes that smart beta’s main appeal for pension funds is that it targets alpha returns at beta fees and beta risks, which marks a big improvement on cap-weighted indices.

Taking a three-year forward view, respondents indicated there will be an across-the-board increase in the demand for passive funds with a central thrust tilted towards three kinds of portfolio strategies: smart beta, ESG (environmental, social, and governance), and other thematic strategies.

ESG has gained in popularity following the adoption of the UN Sustainable Development Goals with pension funds seeing the deployment of ESG strategies as a cost-effective means to enhance their stewardship agenda. The survey found that three-in-five (60%) pension funds regard stewardship as ‘very important’, while 80% expect stewardship demands on their passive asset managers to increase.

Simon Klein, DWS’s Head of Passive Sales for Europe and Asia, commented, “As one of the world’s most established providers of passive investments, and one which has put in place active stewardship on passive funds, we welcome this confirmation that pension funds view stewardship as a key differentiator while also increasingly treating passive solutions as mainstream in their portfolios.”

Tags: , , , , , , ,

Leave a Comment