TORONTO, ONTARIO--(Marketwired - Jan. 20, 2016) - Canadian institutional investors are increasingly using exchange-traded funds (ETFs) for strategic asset allocations, and are leading the world in the innovative application of ETFs to realize their investment strategies - even beyond equities - according to the Greenwich Associates 2015 Canadian Exchange-Traded Funds study.
In its third annual survey of institutional ETF use, sponsored by BlackRock Asset Management Canada Limited (BlackRock Canada), Greenwich Associates found that participating institutions hold just over one-fifth - 21.2 per cent - of total assets in ETFs, while asset managers allocate on average more than a quarter of total assets under management to the funds. Despite that already-strong usage, nearly a third of those surveyed plan to increase their ETF allocations in the coming year.
"We've seen institutional acceptance of ETFs explode in recent years, but today the 'how' of ETF use has become just as important as the 'how much,'" said Warren Collier, Managing Director, Head of iShares, BlackRock Canada. "As the survey shows, Canadian institutions are leading the world not only in how much they use ETFs, but also in the ways they are using them - from strategic allocations to achieving fixed income exposures and replacing derivatives. As more institutions realize the benefits of ETFs, we expect this trend to continue."
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More ETFs, used more strategically
Canadian ETF allocations are relatively high on a global basis, but it is the way institutions and asset managers are using the funds that sets them apart. According to Greenwich Associates, institutions typically start using ETFs for short-term tactical tasks, such as portfolio rebalancing and manager transitions. As they become more familiar with the funds, they begin to integrate them into more complex, strategic functions. In this evolution, Canadian institutions are ahead of their U.S. and European counterparts. The survey suggests that nearly two-thirds - 63 per cent - of Canadian institutional ETF assets are categorized as strategic. That is up from the previous year, when participants said half of ETF assets were strategic. In fact, the most commonly cited reasons for using the funds today are portfolio diversification (83 per cent) and obtaining core investment exposures (78 per cent) - both of which are clearly strategic applications.
This increasingly strategic approach is reflected in the fact that institutions are tending to hold ETFs longer. In any portfolio, assets held for two or more years represent long-term strategic holdings. In the most recent survey, 47 per cent of reporting institutions hold ETF assets for at least two years on average - up from just 31 per cent last year.
Liquidity needs drive growth in Fixed Income ETFs
Institutional investors widely use ETFs in their equity portfolios, and not just to gain domestic exposures. In fact, international diversification is the most commonly cited reason for ETF use, as the funds allow investors to gain access to global equities that would be difficult or expensive to purchase directly, or about which they have little research insight.
Notably, more and more institutions are realizing similar benefits beyond equities, and particularly in fixed income ETFs, whose use has skyrocketed. According to the Greenwich Associates survey, nearly 70 per cent of Canadian institutions now employ fixed income ETFs, up from just more than half last year and 45 per cent two years ago.
One driver of this increase is the current interest rate environment. Institutional investors are seeking shorter durations in anticipation of rising rates, and as they do so they are moving assets out of individual bond positions and into ETFs. The most common reason, cited by 95 per cent of respondents, was ease of use and quick access - familiar ETF benefits. The same proportion, however, cited another factor: liquidity.
Compared with the U.S. or European fixed income markets, Canada's bond market is small and relatively illiquid. As well, post-financial crisis regulations, including bank capital reserve requirements, have changed the landscape for bond trading globally and here at home, impacting liquidity and making the buying and selling of fixed income more difficult. In response, institutional investors are increasingly turning to bond ETFs to achieve fixed income exposures, and global bond ETF liquidity has grown more than four-and-a-half times since 2008. According to Greenwich Associates, even with the relatively high adoption rates for bond ETFs in Canada, continuing concerns over liquidity in fixed income will likely continue to drive growth in future.
Innovation: Canada leads the way
One factor driving the growth in ETF use and allocations is the institutional adoption of innovative products, which is growing much faster in Canada than elsewhere. According to the Greenwich Associates survey, nearly half of institutional investors - 44 per cent overall, and 48 per cent of fund managers -are employing non-market-cap-weighted or smart beta ETFs in their funds. That compares with just 28 per cent of U.S. institutional ETF users. Among Canadian asset managers, that share hits 48%. In the U.S., 28% of institutional ETF users invest in these types of funds.
The range of innovative uses is also remarkable. Among those who have invested in non-market-cap-weighted or smart beta funds, four in five use multi-factor ETFs, three-quarters use equal-weighted ETFs, 70 per cent use minimum volatility ETFs and 56 per cent employ single-factor ETFs.
Canadian institutions' rapid adoption of innovative ETFs is not limited, however, to equities. In fact, forty-four per cent of non-market-cap-weighted or smart beta ETF users now employ smart beta funds in fixed income, and a quarter use smart beta ETFs in commodities. That compares with just five per cent of U.S. institutions that have adopted smart beta bond ETFs, and just one in 10 using smart beta commodities ETFs.
ETFs as Derivatives Replacements
A growing trend among Canadian institutions is the use of ETFs to replace traditional derivatives. Derivatives use is still strong among Canadian respondents to the Greenwich Associates survey, with 50 per cent using futures to access beta, 46 per cent using them for hedging and 31 per cent employing derivatives for fully-funded long positions. However, three-quarters of survey respondents said that an S&P 500 Index ETF provides more cost-effective beta exposure than an S&P 500 future - and many are acting on that insight.
Nearly three in five Canadian institutions that use futures for beta access say they replaced derivatives products with ETFs over the past year to achieve better operational simplicity, while 25 per cent did so to reduce costs. More tellingly, 80 per cent of institutions say they expect to swap existing futures positions for ETFs in the next year, while about 10 per cent say they will use bond ETFs to replace fixed income futures.
"This year's survey confirms what we are seeing day-to-day in our work with institutional investors," said Collier. "The benefits and the range of options that ETFs provide are becoming increasingly apparent, and institutions are responding by using them in more innovative ways. The fact that Canada is leading the world on this trend speaks to the sophistication of its institutional investors, as well as to the diversity and strength of options available to them in the Canadian ETF marketplace."
Methodology
Greenwich Associates interviewed 50 Canada-based institutional investors, 37 of which are exchanged-traded fund users and 13 are non-users, in an effort to track and uncover usage trends. Respondents included 33 asset managers that actively manage money for institutional funds, 12 institutional funds, including corporate pensions, public pensions, foundations, and endowments, and five insurance companies.
About BlackRock
BlackRock is a global leader in investment management, risk management and advisory services for institutional and retail clients. At December 31, 2015, BlackRock's AUM was US$4.645 trillion. BlackRock helps clients around the world meet their goals and overcome challenges with a range of products that include separate accounts, mutual funds, iShares® (exchange-traded funds), and other pooled investment vehicles. BlackRock also offers risk management, advisory and enterprise investment system services to a broad base of institutional investors through BlackRock Solutions®. As of December 31, 2015, the firm had approximately 13,000 employees in more than 30 countries and a major presence in global markets, including North and South America, Europe, Asia, Australia and the Middle East and Africa. For additional information, please visit the Company's website at www.blackrock.com/ca / Twitter: @BlackRockCA / Blog: www.blackrockblog.com/can
About iShares
iShares is a global leader in exchange-traded funds (ETFs), with more than a decade of expertise and commitment to individual and institutional investors of all sizes. With over 700 funds globally across multiple asset classes and strategies and more than US$1 trillion in assets under management as of December 31, 2015, iShares helps clients around the world build the core of their portfolios, meet specific investment goals and implement market views. iShares funds are powered by the expert portfolio and risk management of BlackRock, trusted to manage more money than any other investment firm(1).
(1) Based on US$4.645 trillion in AUM as of 12/31/15.
