The evidence is building that institutional investors including pension funds are looking more towards ETFs as an appealing investment vehicle.
Recent analysis compiled by Blackrock found that pension funds especially are more aware of ETF benefits than ever before.
They noticed the resilience of fixed income ETFs at the start of the Covid-19 crisis in the spring of 2020, and the subsequent use of these products by the Federal Reserve for its monetary policy.
The Covid-19 crisis and following market events have emphasized the importance of having sufficient liquidity in investment portfolios.
As ETFs are often used as liquidity sleeves with many being index based and taking long term investment positions, they are seen as more of a comfortable fit for pension funds due to their segregated mandates and ability to manage market exposure factoring in duration and credit exposure.
In terms of scale, as ETFs provide superior liquidity, pension funds are able to execute large trades with only minimal market impact, and these are changes that can be implemented swiftly
According to Blackrock allocations to the magnitude of EUR1 billion can typically be done in one to two days, whereas allocating such a size to underlying bonds could take more time.
ETFs are also winning plaudits for cost effectiveness, such as how they allow investors convenient and cost efficient market access, especially in less liquid asset classes where using ETFs can save on trading costs.
An ageing population has accelerated the amount of defined contribution (DC) pensions schemes, and as they often begin from zero they need a diversified portfolio from day one.
Blackrock figures revealed that reforms in the Netherlands and Germany alongside general growth, will see a surge in European DC assets from USD4 trillion in July to over USD12 trillion by 2030.
Paul Marino, the chief revenue office for Themes ETF, says: “From an allocation standpoint, ETFs offer a broad range of asset classes, sectors, and geographies, allowing pension funds to diversify their portfolios more effectively.
“Lower cost and recent regulatory changes in Europe, such as the introduction of the Sustainable Finance Disclosure Regulation, have encouraged more transparent and sustainable investment practices, which align well with the structure of many ETFs.
“Broad equity and fixed income ETFs that offer exposure to a broad range of stocks, providing diversification across different sectors and geographies.
“ESG ETFs have seen substantial growth, thematic ETFs that focus on specific themes or sectors, such as technology, healthcare, or clean energy for targeted target growth areas in the market.”
Tom Bailey, the head of research at HANetf, reflects: “At HANetf, we’ve long championed the versatility of ETFs as a way for institutional investors to gain exposure to a wide range of markets and strategies in a simple and efficient way.
“Pension funds, in particular, appreciate the liquidity and transparency of ETFs, as well as their ability to integrate seamlessly into existing portfolios.
“Also, pension funds have traditionally used ETFs to gain broad exposure to equity and fixed-income markets, taking advantage of the diversification and low costs offered.
“However, alongside this, we think there’s been a noticeable shift towards more thematic and active ETFs.
“We’ve seen growing interest in ETFs that tap into transformative trends such as the future of defence, emerging market internet companies and commodities that are key to the energy transition such as copper.”
While Archie Jones, the investor relations associate at Tabula, says: “The trend is highly likely to continue for a few reasons.
“Managers are very focused on creating ever larger ranges of value-added solutions covering the spectrum from algorithmic to traditional active.
“Equally importantly, ETFs are their most efficient delivery vehicle for both operational costs and breadth of distribution.
“Finally, as a result of the above, investors are very focused on the space, use ETFs actively and drive the circular momentum.”
