The exponential growth of the global exchange traded products (ETPs) industry, including exchange traded funds (ETFs), is continuing. After gathering $62 billion in new assets in January, combined assets under management for the world's ETPs stood at a record $3.68 trillion.
In the seventh annual study on ETF adoption at the institutional level, conducted in conjunction with BlackRock, Greenwich Associates notes ETF use by institutional investors continues to increase. The survey, ETFs: "Active" Tools for Institutional Portfolios, polled 187 professional investors, ranging from institutional funds to asset managers and insurance providers. Those investors have nearly $6.7 trillion in assets under management, according to the Greenwich study.
"Overall, institutional ETF users invest an average of 21% of total assets in ETFs—up from 19% in 2015. Those allocations are likely to grow in 2017. Forty-seven percent of equity ETF investors and 38% of bond ETF investors expect to increase their allocations to the funds in the year ahead," said Greenwich Associates.
Year-to-date, three of the top 10 ETFs, in terms of new assets added, are bond funds, a trio that includes the iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD). LQD now has $30.7 billion in assets under management, is this year's top asset-gathering bond ETF and the second-best ETF in terms of 2017 inflows overall.
Institutional investors are finding unique uses for ETFs. For example, the Greenwich survey notes 52% of respondents replaced traditional derivatives with ETFs in 2016 and a third of those polled plan to do the same this year.
The survey also says institutional investors are increasingly warming to smart beta ETFs.
"Growing numbers of institutions are turning to innovative ETF exposures to help navigate the challenges posed by low interest rates and increasing market volatility," said Greenwich Associates. "The share of institutional ETF users investing in smart beta ETFs increased to 37% in 2016 from 31% in 2015. The two most popular fund types in this category are minimum-volatility ETFs and dividend/equity-income ETFs."
Previous barriers to ETF entry for institutional investors are waning. For example, improving liquidity and continuing reductions in ETF fees are making the asset class more appealing to institutional investors, according to Greenwich Associates. Two years ago, a quarter of institutional investors were barred from using ETFs, but that number dipped to 19% last year.
Frequent uses of ETFs by institutional investors include tactical allocations, core holdings and the ability to efficiently access international markets.