Institutions Will Continue Increasing Use Of ETFs

On a global basis, exchange traded products added a whopping $347 billion in new assets last year. Said another way, the amount of money that flowed into ETFs last year exceeds the current market value of Exxon Mobil Corp. XOM, the largest U.S. oil company.

While it is still early in 2016, making predictions about this year's ETF flows hard to predict, data indicate institutional investors will continue ratcheting up their use of ETFs. U.S. institutions plan to increase their use of ETFs in 2016 according to a new report, Institutional Investment in ETFs: Versatility Fuels Growth from Greenwich Associates.

The study, which is in its fifth year, was commissioned by BlackRock Inc. BLK, the world's largest asset manager, and parent company of iShares, the world's largest ETF sponsor. New York-based BlackRock garnered $130 billion of the $347 billion that flowed into exchange-traded products last year. Five of last year's top 10 asset-gathering ETFs were iShares funds.

Currently, U.S.-based institutional investors account for a significant percentage of U.S. ETF use. These investors currently hold 36 percent, or $756 billion of $2.1 trillion in U.S. ETF assets under management, according to the Greenwich Associates study. The firm survey 183 institutional investors regarding their ETF use, including 41 asset managers, 51 institutional funds (pensions, endowments and foundations), 47 RIAs, 24 insurance companies and 20 investment consultants. 

“All of the ETF users in the study invested in equity ETFs, with 36% planning to increase allocations in the year ahead and 35% of those planning to boost allocations by 10% or more.  35% of fixed income ETF users expect to increase allocations this year, and 36% plan to do so by 10% or more,” said Greenwich Associates.

Professional investors are expected to boost their usage of fixed income ETFs with nearly two-thirds already owning bond ETFs. Although interest rates for the first time in almost 10 years in December, four of this year's top 10 asset-gathering ETFs are bond funds, a quartet that includes the iShares 20+ Year Treasury Bond ETF TLT and the iShares 7-10 Year Treasury Bond ETF IEF. 

Professional investors also continue embracing smart or strategic beta ETFs.

“Approximately 30% of institutions are employing smart beta (non-market-cap weighted) ETFs, and an equal percentage are using currency hedged ETFs. At the same time, asset managers offering increasingly popular multi-asset-class funds are using ETFs to fully implement strategies or scale their products. ETFs now make up 48% of assets in multi-asset portfolios, according to asset managers running these funds,” said Greenwich Associates.

Two of the top three asset-gathering ETFs in 2015 were currency hedged ETFs. With global equity markets volatile to start 2016, low volatility ETFs, such as the iShares MSCI USA Minimum Volatility ETF USMV, could prove to be leaders of smart beta growth this year. To start 2016, USMV has already added $464.2 million in new assets, a total exceeded by just nine other ETFs.