Institutional appetite for ETFs keeps growing

Deborah Fuhr

In its European ETF survey for 2012, Edhec-Risk Institute found that 67% of respondents expect institutional investors to increase their use of exchange-traded funds while only 4% expect a decline.

Investor satisfaction with ETFs has been consistently high over the seven years the study has been conducted.

Investors are much more positive about ETFs than they are about alternative index products: 30% of survey respondents expect to decrease their use of total return swaps, with 11% foreseeing an increase; 26% plan to increase their use of index funds while 24% said they would use them less; and 28% indicated they would use more futures, compared with 9% expecting to decrease their use.

This corresponds with the findings of several other studies in the past few months highlighting the growth in both ETF users and the assets held by them.

Performance and costs of active funds have been factors driving investors to embrace ETFs. The S&P Indices Versus Active Scorecard, which serves as the scorekeeper of the active versus passive debate, found that most active managers in the US in all categories, apart from large-cap growth and real estate funds, underperformed their benchmarks last year. Performance lagged behind the benchmark indices for 63.25% of large-cap funds, 80.45% of mid-cap funds and 66.5% of small cap funds. The performance figures are equally unfavourable for active funds when viewed over three and five years.

The number of institutional ETF and exchange traded product users is still growing. Our analysis of reported share ownership of ETFs and ETPs using the Thomson Reuters Share ownership database has found that the number of institutional investors that have used the instruments globally has risen at a compound annual growth rate of 8.9% in the five years to 2011.

From 2005 to 2011, there has been an 84% increase in the number of institutions using one or more ETFs and ETPs, rising from 1,770 institutions globally in 2005 to 3,256 in 49 countries in 2011. The top five countries in 2011 with the largest number of ETF and ETP users are the US, the UK, Germany, Canada and Switzerland, representing 82.6% of total global use.

In 2011, the top four types of firms holding ETFs and ETPs were investment advisers, investment advisers/hedge funds, hedge funds, banks and trusts. Investment advisers, with a CAGR of 10.3% over five years, constituted the largest and fastest-growing user segment with 1,984 firms in 2011. In total, hedge funds were ranked third by number of funds (367) but second based on a CAGR of 8.2% over five years.

http://www.efinancialnews.com/story/2013-04-15/institutional-investor-appetite-growing-etfs