Although there are roughly 7,000 ETFs available globally, the majority of assets under management (AUM) belongs to a relatively small number of funds. In fact, among the 100 largest ETFs, the top 20 hold over 50% of the assets.
In this infographic from iShares, we rank the top criteria institutional investors use when selecting an ETF. It’s the last of a five-part series covering key insights from the ETF Snapshot, a comprehensive report on how ETFs are being used.
The Methodology
To assess how institutional investors navigated this volatility, Institutional Investor published a report in 2021 based on a survey of 766 decision makers. Respondents were from various types of organizations, firm sizes, and regions.
For instance, here is how responses broke down by location:
21% Asia Pacific
36% North America
29% Europe, Middle East and Africa
14% Latin America
Here’s what the survey found.
The Top Criteria for Picking an ETF
The following table lists the most important criteria institutional investors consider when selecting an ETF.
Criteria
% of respondents (n=762)
AUM, liquidity, and trading volume
68%
Benchmark index used
53%
ETF provider’s brand and market position
48%
Historical performance
46%
Value-added services from ETF provider
45%
Management fee
34%
Transaction cost
29%
n=762
The key takeaway is that institutional investors seek large, highly liquid ETFs that are linked to the right benchmark. Perhaps surprisingly, management fees and transaction (Read more...)
Institutional investors are relying more on ETFs during periods of severe volatility—but how exactly is this vehicle being used within their broader portfolios?
In this infographic from iShares, we highlight their three primary use cases for ETFs. It’s the third of a five-part series covering key insights from the ETF Snapshot, a comprehensive report on how institutional investors manage volatility.
The Methodology
To assess how institutional investors navigated this volatility, Institutional Investor published a report in 2021 based on a survey of 766 decision makers. Respondents were from various types of organizations, firm sizes, and regions.
For instance, here is how responses broke down by location:
70% of respondents (n=534) use ETFs when moving from one manager to another. The following table provides a breakdown of regional results.
Region
% of respondents listing “transition management” as an ETF use case
Latin America
81%
EMEA*
73%
North America
69%
Asia-Pacific
55%
Average
70%
*EMEA includes Europe, Middle East, and Africa
Institutional investors cited the extra utility that ETFs provide, namely in terms of maintaining beta exposure (the portion of return that can be attributed to the overall market) and minimizing performance drag (the negative effect of fees on performance).
In other words, using relatively low cost ETFs during transitions can enable an institutional investor to maintain market exposure with minimal fees.
ETF Use Case #2: Tactical Adjustments
61% of respondents (n=468) use ETFs to make tactical adjustments within their portfolios. The following table provides a breakdown of regional results.
Region
% of respondents listing “tactical adjustments” as an ETF use case
Latin America
69%
EMEA
69%
North America
59%
Asia-Pacific
49%
Average
61%
Tactical asset allocation refers to shifts in the portfolio’s asset mix that are intended to take advantage of market pricing anomalies or strong sectors. Tactical adjustments are temporary, and a manager will eventually bring the portfolio back to its strategic asset mix after the achieving their desired results.
When asked which types of ETFs are suitable for implementing tactical adjustments, 66% responded with fixed income, 57% responded with equities, and 34% responded with factor/smart beta ETFs.
ETF Use Case #3: Liquidity Management
The third most common ETF use case (n=394) was liquidity management. See below for a breakdown of regional results.
Region
% of respondents listing “liquidity management” as an ETF use case
North America
84%
Latin America
55%
EMEA
38%
Asia-Pacific
15%
Average
52%
When asked which types of ETFs are suitable for managing portfolio liquidity, 83% responded with fixed income, 27% responded with equities, and 22% responded with factor/smart beta ETFs. This is likely due to the events of 2020, where panic over the initial outbreak of COVID-19 caused bond market liquidity to dry up.
ETFs Continue to Gain Ground
Thanks to their suitability in various use cases, ETFs have quickly become a core component of the institutional investor’s toolkit. In fact, 65% say they will increase their use of ETFs going forward.
Those that didn’t may soon change their minds—experts have predicted more market volatility in 2022 as supply chain issues, inflation, and geopolitical conflicts escalate.
Fixed Income ETFs: Investors’ Ticket to Flexibility
When market volatility surges, fixed income investors encounter multiple pressure points. For example, they may face difficulties with liquidity, price discovery, and transaction costs.
In this infographic from iShares, we show how fixed income ETFs help address these challenges. It’s the second in a five-part series covering key insights from the ETF Snapshot, a comprehensive report on how institutional investors manage volatility.
The Methodology
To assess the role that ETFs play, Institutional Investor published a report in 2021 based on a survey of 766 decision makers. Respondents were from various types of organizations, firm sizes, and regions.
For instance, here is how responses broke down by location:
21% Asia Pacific
36% North America
29% Europe, Middle East and Africa
14% Latin America
Here’s what the survey found.
Encountering Roadblocks
During 2020 market volatility, the vast majority of institutional investors said they had difficulty sourcing(95%) and/or transacting (92%) in individual bonds.
Smaller firms faced these roadblock more often than larger institutions.
Assets Under Management
% Who Faced Great Difficulty Sourcing Bonds
$5B or less
61%
$5B-$50B
46%
$50B+
42%
How did institutional investors overcome these liquidity challenges?
Turning to Fixed income ETFs
More than half of institutions increased their use of ETFs as they looked to source, price, and transact bonds. In fact, in the first three months of 2020, fixed income ETF trading volume reached $1.3 trillion—half of 2019’s total.
ETFs also became more popular relative to their underlying basket of securities. During extreme volatility in April 2020, ETF trading volume relative to the underlying securities was three times higher than the 2019-2020 average.
With their higher liquidity, ETFs also helped institutional investors with price discovery.
“When there was no trading activity in certain corporate bonds, you can use the ETFs as a pretty good proxy for what people are willing to pay and what the appetite is.” —Senior Analyst, Asset Management firm
However, the usefulness of fixed income ETFs goes far beyond liquidity.
Institutional investors said fixed income ETFs were a good replacement for individual bonds for a number of reasons.
Reason
% of Respondents
Liquidity
61%
Quick Market Exposure/Access
55%
Avoidance of Individual Security Analysis
51%
Transparency of Holdings
46%
Transaction Costs
40%
The difference in transaction costs is particularly evident in the fixed income landscape. During extreme market volatility in March 2020, the bid-ask spread* for the iShares High Yield Corporate Bond ETF was 48 times smaller than the underlying securities.
* A bid-ask spread measures the difference between what an investor is willing to buy a fund for (the bid price) and the price an investor is willing to sell for (the ask price). A smaller bid-ask spread indicates greater cost efficiency.
In light of these attributes, fixed income ETFs are a go-to tool for institutional investors. In fact, they were top-rated for a number of use cases.
Purpose
% of Respondents
Portfolio Rebalancing
62%
Tactical Adjustments
66%
Derivative Complement/Replacement
66%
Transition Management
74%
Liquidity Management
83%
One senior analyst at an asset management firm noted that it was easy to get granular with asset allocation because there are so many ETFs with plenty of liquidity.
The Future of Fixed Income ETFs
As of May 2021, fixed income ETFs made up 18% of all ETF assets under management. It’s likely that their role could become more prominent in the future.
For instance, 34% of institutional investors are likely to increase their use of fixed income ETFs going forward. One thing is evident: fixed income ETFs have proven to be flexible tools, especially during heightened market volatility.
Why ETFs Are Critical Tools During Market Volatility
Investors experienced record-breaking volatility in 2020. During COVID-19 market turbulence, the CBOE Volatility index surpassed the previous peak seen in 2008.
In this infographic from iShares, we explore how ETFs rose in popularity during this time—and the characteristics that make them particularly useful during market volatility.
The Methodology
To assess how institutional investors navigated this volatility, Institutional Investor published a report in 2021 based on a survey of 766 decision makers. Respondents were from various types of organizations, firm sizes, and regions.
For instance, here is how responses broke down by location:
21% Asia Pacific
36% North America
29% Europe, Middle East and Africa
14% Latin America
Here’s what the survey found.
Rebalancing During Market Volatility
In total, 90% of institutional investors said they rebalanced their portfolios between the first and third quarter of 2020. How did they do it?
Among all financial tools, ETFs were the most popular vehicle for rebalancing. For instance, ETFs were used by 70% of investors globally, compared to the 51% who used mutual funds or derivatives.
The popularity of ETFs was evident in market activity. From January to March 2020, ETFs as a proportion of total equity trading volume increased.
