Differences in Usage Among ETF Investors

From DB Markets Research,

Institutional ETF Ownership nears 60% at the end of 2015
Institutional investors continue to jump into ETFs. As of the end of 2015, we estimate that 59.3% of ETF assets were owned by Institutional Investors up from 58.3% at the end of 2014, and up from 43% ten years ago. Investment advisers continue to dominate ETF usage with 29%, while Mutual Funds, Pension Funds, and Insurance Companies continue to increase their ETF utilization. Over 3,100 institutions had over $1.2 trillion invested in over 1,500 ETFs as of the end of last year. Our detailed ownership analysis reveals significant differences in usage among ETF investors.

Product usage suggests investors see multiple value propositions in ETFs
Not every type of investor uses ETFs for the same purposes. Some institutional investors use ETFs as a core strategic investment, others use them as a liquidity or hedging tool, and others may use them as a short-term access product to gain quick exposure or equitize cash.

Investment Advisers use ETFs mostly as core investment
Investment Advisers usually prefer very cheap products which usually track plain-vanilla equity and bond indices tracking major model portfolio building blocks. Investment Advisers tend to run simple asset allocation model portfolios which tend to be very scalable, and don’t experience significant turnover, therefore clean asset class exposure and cost tend to be key on the selection of products. The low product concentration relative to other institutional groups also suggests a very broad selection universe and satellite investment usage. Vanguard and iShares Core ETFs are very popular among this group.

Mutual Fund and Hedge Fund managers mostly use ETFs for operational efficiency
We believe that the most common usages of ETFs by Mutual Funds,in order of relevance, are: cash equitization, liquidity management, and core investment; while Hedge Funds mostly use ETFs for gaining quick and efficient access both on the long and short side to their desired asset class, similar to futures contracts. In general, the nature of these groups’ ETF usage leads to shorter holding period and higher portfolio turnover of ETF positions.

Pension Funds seem to be using ETFs for reducing the complexity embedded in multi asset global allocation mandates
ETFs are usually seen as a way to obtain access to different asset classes in an efficient way, and therefore ETFs tend to play a more strategic role in pension portfolios. Usually pension funds use ETFs as building blocks for more efficient financial markets, or markets that are difficult to access. Given the more strategic nature of ETFs in pension portfolios, turnover tends to be somewhere in between Investment Adviser and Mutual Fund. A combination of factors including exposure, liquidity, size, and cost is usually more important than any single selection criterion on its own.


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