European Investors Use ETFs For Strategic Allocation

European investors said the majority of their exchange-traded investments are strategic, as opposed to tactical, in nature for the first time since consultancy Greenwich Associates began carrying out its annual survey in the region in 2014.

Greenwich Associates’ report, In Turbulent Times, European Institutions Turn to ETFs, said allocations to ETFs by institutions increased by 50% in last year, totalling 15% of total assets among the 127 institutional investors participating in the study.

“European institutions are increasingly using ETFs to obtain long-term investment exposures that play critical, strategic roles in their portfolios,” said the report. “For the first time since the debut of this study, European investors say the majority of their ETF investments are strategic, as opposed to tactical in nature.”

Approximately 60% of respondents used ETFs to obtain investment exposures in “core allocations” last year, up from 47% in 2017.

“The share using ETFs for international diversification—another critical strategic function— increased to 58% from 48%,” added the report.

Andrew McCollum, Greenwich Associates

Andrew McCollum, managing director at Greenwich Associates, who advises on the investment management market globally, said in the report that nearly 40% of existing institutional ETF investors plan to increase allocations this year.

ETF allocations were 15% of total assets last year, up from 10% in 2017 and almost double the 7.6% in 2016.

Globally ETFs had inflows of $315.8bn last year, the second-highest on record following the all-time high in 2017. Greenwich noted that last year’s inflows occurred despite volatile market conditions and the deep sell-off in global equity markets.

A respondent from a large UK investment manager said in the report that ETFs offer the “ease of affecting lower operational risk at a reasonable price.”

Fixed income

Greenwich said equity ETF investors more than doubled their allocations to approximately 28% of total assets last year, from 14.4% in 2017. In fixed income, ETF allocations doubled to 20% of total assets from just 6.5% in 2017.

“Bond ETF allocations were largest among institutional funds, at nearly a quarter of total fixed-income assets,” said Greenwich.

Approximately one fifth of current ETF investors expect to increase allocations in this year.

In addition nearly two-thirds, 61% of professional investors, expect flows into fixed income investment vehicles to increase this year when compared to 2018, according to a new survey from Tabula Investment Management, the European fixed income ETF provider.

“Increased flows could be partly fuelled by growing innovation in the fixed income ETF sector, with 69% of professional investors expecting up tick year,” said Tabula. “This could be reflected in more fixed income ETFs being launched in 2019  – 8% of professional investors expect to see a ‘dramatic’ increase in the number listed, and a further 43% anticipate a smaller increase.”

MJ Lytle, Tabula Investment Management

Tabula’s survey found that 70% of institutional investors said it is important that the new ETFs specialise in certain areas and develop propositions around this,  and 62% said this about having unique and innovative products.

Michael John Lytle, chief executive of Tabula said in a statement: “Flows into fixed income investments, particularly through ETFs, have increased. To succeed in this market, you need to offer new investment opportunities with competitive fees which address some of the key concerns that fixed income investors face.”

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