Thursday, May 10, 2018 Stamford, CT USA — Canadian institutions that use ETFs allocate an average 18.8% of total assets to exchange-traded funds (ETFs)— the highest average allocation found in any institutional market in the world. 

The 52 institutions participating in the Greenwich Associates 2017 Canadian ETF Study are at the forefront of a growing move by institutions around the world to integrate ETFs into their portfolios and ETF versatility is the primary driver of this proliferation. At the strategic level, Canadian institutions are increasingly using ETFs to obtain “core” investment exposures and diversification benefits. Use of ETFs increased last year in each of the 10 primary portfolio functions covered in the study

“Canadian institutions are using ETFs because they are easy to use, fast to execute, liquid, simple, relatively cheap to trade, and provide diversification in a single trade,” says Andrew McCollum, Greenwich Associates Managing Director and author of a new report presenting the research findings, Canadian Institutions Lead the Way in ETF Investing. 

“This study provides the entire industry with important insights into the evolution of institutional investors’ approach to ETFs, and it confirms the trends we’re seeing on the ground,” says Pat Chiefalo, Head of iShares Canada at BlackRock. “Institutional investors’ use of ETFs is not only growing but broadening, as they deploy the funds in increasingly diverse ways to implement a range of strategies and realize new benefits.”

Drivers of Growth
The steadily expanding use of ETFs reflects institutions’ embrace of the funds as an effective source of beta exposures that they are using alongside—and at times in place of—derivatives. Although ETFs are frequently employed as part of a switch from active to passive investment strategies, Canadian institutions are also using index ETFs to obtain exposures used to generate alpha at the asset allocation level in actively managed strategies.

Increasing demand for non-market cap weighted ETFs is providing a major lift to overall investment. Almost half (46%) of study participants invest in non-market-cap-weighted ETFs, with demand last year focused largely on minimum-volatility ETFs, designed to protect investors from a spike in volatility like the one seen in February 2018.

Projected: Continued ETF Expansion 
Greenwich Associates projects a continuation of this growth trajectory. In equities, the share of current investors planning to increase ETF allocations tops that planning reductions by a ratio of 3:1. In fixed income, planned increases outpace planned cuts by nearly a 2:1 margin. In both cases, sizable shares of institutions expect to increase ETF allocations by more than 10%. “In the meantime, new institutional investors will continue entering the ETF market in fixed income, commodities, real estate, and other asset classes,” Andrew McCollum says.