Canadian institutional investors are increasingly turning to exchange-traded funds (ETFs), according to new research from Greenwich Associates.
The firm reports that its research into institutional ETF usage found that more than a third of institutions that already use ETFs expect to increase their allocations in the coming year. The study, which was conducted by Greenwich Associates and sponsored by BlackRock’s ETF business, iShares, took place between April and May and is based on interviews with 18 institutional funds and 29 asset managers.
Greenwich says that the share of Canadian institutional funds using ETFs only increased modestly last year, inching up from 11% in 2011 to 12% in 2012, but that the increase was more dramatic among the country’s largest funds. It notes that 21% of Canadian institutional funds with more than $1 billion in assets under management (AUM) are now employing ETFs in their portfolios, up from 15% in 2011.
The firm reports that its research found that nearly 45% of the institutional funds it surveyed expect to increase allocations to ETFs by 2014 and no funds plan to decrease allocations. The remaining 55% plan to hold ETF investment steady in the coming year.
In terms of asset allocation, more than 70% of institutions in the study employ ETFs in equities, it says. Institutional funds use equity ETFs primarily to gain Canadian and U.S. equity exposure, it says, whereas 83% of asset managers use equity ETFs for international market exposure. Additionally, 50% of institutional funds and 45% of investment managers use ETFs in domestic fixed income, and 28% use ETFs for international fixed-income exposure.
Usage of ETFs is also becoming relatively common in other asset classes, Greenwich reports, noting that about one-third of the institutional funds and asset managers in the study use ETFs in REITs. “Canadian institutional investors are hungry for real estate exposure,” says Greenwich Associates consultant, Andrew McCollum. “ETFs offer a relatively efficient means of obtaining that exposure for smaller funds or for funds concerned about the risk and complexity of investing in real estate directly.”
The firm also reports that liquidity and trading volume are “far and away” the most important criteria that Canadian institutions consider when choosing an ETF, with 83% of institutional funds and 76% of asset managers citing these features as a top selection criterion. Institutional funds see the tracking error of the fund and the benchmark used as other important selection factors, it notes.