ETFs deliver the versatility that European institutional investors want in the current fast-changing global market environment, according to a recent study by Greenwich Associates.
Andrew McCollum, managing director at Greenwich Associates.
“After multiple years of regular use, European institutions have found ETFs to be simple, versatile and cost-effective tools, and they are ramping up their investments at a rapid clip,” says Greenwich Associates managing director, Andrew McCollum.
A total of 125 institutions participated in the Greenwich Associates European ETF Study, all of which are facing the return of volatility, the looming move to a rate-rising environment, the impending end of European Central Bank bond buying and the ongoing implementation of MiFID II and other new regulations, notes McCollum.
The study found that European investors are increasingly turning to ETFs in order to meet these challenges and integrating the product into their tactical and strategic investment processes and strategies. Average ETF allocations among the institutions participating in the study increased to 10.3% of total assets in 2017 from 7.7% in 2016.
Much of that growth can be attributed to the entry of new institutional users to the ETF market – especially in fixed income. The share of study participants investing in fixed income ETFs increased to 45% in 2017 from 38% in 2016.
Institutional investors are increasingly adopting ETFs in other asset classes as well. Approximately one-quarter of European institutions used ETFs in REITs in 2017, up from one in five in 2016. Over the same period, the proportion of European institutional investors using commodity-based ETFs climbed to one-third, up from just 20%.
[pullquote]“ETFs are the natural result of the evolution of the European financial market, where investors increasingly crave transparency, choice and value. MiFID II in particular, which mandates trade reporting, is helping to unveil the depth of liquidity in European ETFs and unlock new, creative ways for investors to build smarter portfolios.”
– Fergus Slinger, co-head of iShares EMEA sales at BlackRock[/pullquote]
Fergus Slinger, co-head of iShares EMEA sales at BlackRock, said, “ETFs are the natural result of the evolution of the European financial market, where investors increasingly crave transparency, choice and value. MiFID II in particular, which mandates trade reporting, is helping to unveil the depth of liquidity in European ETFs and unlock new, creative ways for investors to build smarter portfolios.”
Additional drivers of growth
Investments in non-market-cap weighted/smart beta ETFs are growing steadily in institutional portfolios. The share of study participants investing in these funds has increased from 21% to 31% in just two years. Given the increasing popularity of factor investing worldwide, Greenwich expects demand for smart beta ETFs to continue to grow in both retail and institutional portfolios.
European investors are more likely to express environmental, social and governance (ESG) preferences in their portfolios than their global counterparts; about half of European participants have allocated into ESG strategies compared to 31% of the global sample. Almost a third (27%) of European institutions obtained this exposure through index products such as ETFs.
Multi-asset investment funds have emerged as one of the most consistent and fast-growing sources of ETF demand in the institutional space. As investor appetite for these strategies grows, the share of European asset managers buying ETFs for use in multi-asset funds increased to approximately 80% in 2017 from 63% in 2016.
Growth to continue apace
Given these powerful trends, the study concludes that ETFs will likely remain on a growth trajectory through the coming year.
Approximately 40% of participants currently investing in equity ETFs plan to increase ETF allocations in that asset class in the next 12 months, as do a quarter of current fixed-income ETF investors. More broadly, Greenwich Associates projects that total global institutional investment in ETFs will see inflows reach $300bn annually by 2020.