Canadian institutional investors are investing more in ETFs than any other region in the world, says a study from Greenwich Associates, a research firm based in Connecticut.
The 52 Canadian institutions in the study allocate an average 18.8% of their total assets to ETFs, the highest average allocation of the five regional markets covered in the study.
The institutions are using ETFs to attain “core” investment exposures and benefits from diversification, the study said. The use of ETFs increased last year in each of the 10 primary portfolio functions reported in the study.
“Study participants are using ETFs because they are easy to use, fast to execute, liquid, simple, relatively cheap to trade, and provide diversification in a single trade,” said the study.
The increasing use of ETFs reflects the institutions’ use of the funds as a source of beta exposure alongside and, sometimes in place of, derivatives.
“Canadian institutions are also using index ETFs to obtain exposures used to generate alpha at the asset-allocation level in actively managed strategies, in addition to other more permanent exposures,” said the study.
About half (46%) of the institutions invest in smart beta ETFs with a focus last year on minimum-volatility ETFs.
Greenwich forecasts that, for equities, “the share of current institutions planning to increase ETF allocations tops that planning reductions to ETFs by a ratio of 3:1. In fixed income, planned increases outpace planned cuts by nearly a 2:1 margin.”
In both cases, a sizable number of institutions expect to increase their ETF allocations by more than 10%. New institutional investors are expected to keep entering the ETF market in fixed income, commodities, real estate and other asset classes.
Forty-eight percent of the study’s participants were asset managers. The rest of the participants were institutions including endowments, foundations, corporate defined-benefit plans, public pension plans and insurance companies etc. Approximately 45% of the institutions in the study have assets under management (AUM) of $5 billion or more and more than one in five have AUM greater than $50 billion.
A summary of the study can be read here.