Thursday, September 7, 2017 Stamford, CT USA — The steady growth of ETFs in institutional portfolios is being driven in part by a wholesale reconsideration of the long-held distinction between active and indexed investment approaches by institutional investors. A new report from Greenwich Associates finds that passively managed ETFs are increasingly used to achieve active outcomes in institutional portfolios, blurring the lines between active and index approaches.

“With ETFs slotted into a broadening range of portfolio functions by institutions in North America, Europe, Asia, and Latin America, the category is on a solid trajectory to reach the Greenwich Associates projection that total institutional investment in ETFs will see an additional $300 billion in flows annually by 2020,” says Andrew McCollum, Greenwich Associates Managing Director and author of the new report Active Strategies, Indexing and the Rise of ETFs.

Institutional ETF Investments on the Rise

The new report presents the results of Greenwich Associates 2017 Global ETF Study, for which the firm interviewed 481 institutions in 21 countries around the world. These results show that ETF investments are growing and will continue to expand in coming years:

  • In North America, ETFs are becoming nearly ubiquitous in institutional portfolios. U.S. and Canadian institutions have integrated ETFs deeply into their portfolio management strategies, employing these largely index products to proactively construct, maintain and adjust portfolios on a day-to-day basis.
  • In Europe, powerful market dynamics, including quantitative easing by the ECB, increased market volatility and diminished liquidity in fixed income, are causing European institutions to increase their use of ETFs to manage risk, enhance liquidity and generate yield.
  • In Asia, ETF assets under management are expanding due to an influx of new institutional users and continued growth in allocations among current investors. Going forward, the development of these markets and the creation of new ETFs within these markets will spur growth.
  • In Latin America, ETF usage has been limited by the fact that the vast majority of institutional portfolio assets are invested in local markets that do not feature a large number of ETF products. However, Greenwich Associates expects ETF investment to continue growing in Latin America, as providers educate institutions about the possible benefits of UCIT ETFs.
  • Around the world, demand is growing among institutional investors for smart beta ETFs that help address challenges posed by low interest rates and increasing market volatility.

Index Exposures and Active Outcomes

Growth in ETF allocations is occurring amid a shift of institutional assets from active to index strategies—and a corresponding shift in the way institutional investors view the distinction between active and index strategies. Amid a set of challenges ranging from historically low interest rates to the increasing speed and complexity of financial markets, institutions are doing everything they can to optimize performance.

“Institutions realize that, when it comes to the issue of active versus index strategies, it’s not an either-or question,” says Andrew McCollum. “At the portfolio strategy level, a blend of active, alpha-seeking strategies and low-cost, beta-centered index strategies is required to optimize risk/return characteristics.”

Institutions poured $225 billion into index ETFs last year. At the same time, however, ETFs also have emerged as valuable tools in supporting “active” decisions related to portfolio construction and asset allocation. Institutions are applying innovative investment approaches and new ETF structures like smart beta to risk management, liquidity management and other portfolio functions. “As they incorporate such innovative strategies into their portfolios, investors find themselves employing index products to achieve what amount to active exposures, with asset allocation replacing security selection as the primary source of alpha,” says Andrew McCollum.