Download Trends in Institutional Investor Use of Fixed Income ETFs

Trends in Institutional
Investor Use of Fixed
Income ETFs
Presenter:
ANDREW MCCOLLUM
Partner & Managing Director
Greenwich Associates
Table of Contents
Role in Institutional Portfolios
Drivers of Growth
Institutional Fixed-Income ETF Outlook
Conclusions
Greenwich Associates
2
Role in Institutional Portfolios
3
The Appeal of ETFs in the Institutional Market
Direct feedback from the institutional community.
“We have found a lot of new
innovative products are
available in ETF form.” – RIA
“It started out as a
tactical tool to
temporarily hold cash;
over time our use has
evolved into
permanent holdings.”
– Insurance company
“ETFs allow me to
diversify exposure to
style, market
capitalization and
sectors that I would not
be able to efficiently
achieve trading
individual names. The
key word is
diversification.”
– Asset manager
“We use ETFs to fill out when we
can’t find individual bonds.”
– Investment manager
Greenwich Associates
“At times active managers
have difficulty beating their
benchmarks and ETFs are
considerably less
expensive.”
– Pension fund
“We are making greater use
of ETFs as we delve into
other parts of the market
that we would not access
with individual stocks, such
as European, international
and emerging markets. Over
time, we will make even
greater use of ETFs as we
try to tap additional areas
of the market.” – RIA
4
The Root Cause of Growth
Regulatory and policy shifts upended fixed income markets, spelling uncertainty
for its participants.
Fed Policy
• U.S. Federal Reserve - Low interest
rate environment put in place to
inject liquidity and help spur
economic growth
Dramatic increase of bond issuances
in pursuit of cheap money flooded
primary markets
Greenwich Associates
Regulatory Shifts
• Dodd-Frank – Limited size of
financial institutions and lowered
tolerance for risk market-wide
• Basel III – Heightened liquidity
standards for financial institutions
Confluence of regulatory restrictions
constricted liquidity in
secondary markets
5
Illiquidity in Fixed Income Markets
Increased regulatory pressure on financial institutions and a flooded bond
market combined for depleted dealer inventories, high costs, and volatility.
Fixed Income Trading Environment Over
the Past Two Years
Investor Concerns
•
When should I buy the bond?
•
Will I have trouble offloading the
bond?
•
When would I expect to sell? Is
that feasible?
•
How do I recalibrate my portfolio
to adjust for this difficulty?
•
Challenges in Trading, Liquidity
or Sourcing Securities
in Fixed Income Markets
More
Challenging
About the
Same
How do I offset the increased
cost executing trades?
Less
Challenging
34%
Have Challenges Affected
Investment Process?
No
48%
Yes
52%
61%
5%
Note: Based on 119 respondents in 2015.
Source: Greenwich Associates 2015 U.S. Fixed Income ETF Study
Greenwich Associates
6
Drivers of Growth
7
Many Tools in the Toolkit
Investors employ Fixed-Income ETFs for a variety of applications.
Fixed-Income ETF Applications by Institution Type
Insurers
Investment Managers
RIAs
Institutional Funds
73%73%
71%
64%
62%
60%
57%
57%
43%45%
43%
43%
41%
38%
33%
32%
27%
80%
76%
76%
70%
64%
59%
57%
40%
30%
19%20%
14%
10%
10%
0%
ETF
Overlay/Liquidity
Sleeve
Transitions
Hedging
Cash
Equitization/Interim
Beta
Tactical
Adjustments
Portfolio
Completion
Rebalancing
Passive Exposure
in the Core
Note: Based on 60 respondents: 10 institutional funds, 21 RIAs, 22 investment managers, and 7 insurance companies in 2015.
Source: Greenwich Associates 2015 U.S. Fixed Income ETF Study
Greenwich Associates
8
Broadening from Tactical to Strategic Use
Current ETF users are broadening their deployment of fixed-income ETFs from
tactical applications to more strategic portfolios uses.
% of Fixed-Income ETF Assets
Considered Strategic
2011
Average Fixed-Income ETF
Holding Period
70%
42%
62%
2012
62%
57%
46%
2015
2013
2014
58%
2013
2012
2014
2015
63%
74%
1 Year or More
Source: Greenwich Associates U.S. Exchange-Traded Funds Study.
Note: Based on 201 responses: 49 institutional funds, 19 investment consultants, 31 insurance companies, 70 RIAs, and 32 asset managers in 2014. Percentages may not add to 100 due to respondents
preferring not to answer.
.
Greenwich Associates
9
Serving as a Complement to Bonds
Healthy trading volumes and asset growth positions ETFs as complements to
traditional fixed income securities.
Five Largest Credit ETFs
Positive
Velocity
75x
Reasons for Using Bond ETFs Alongside
Individual Bonds
Ease of Exposure
17x
38%
34%
More Liquidity
Depends on Business/Client Requirement
19%
Diversification
19%
Use for Duration Management/Transition
Overall Investment Grade and
High-Yield Credit Market
Negative
Velocity
1.7x
2.1x
16%
Tactical Asset Allocation
9%
Use of a Placeholder/Replacement
9%
Good Value/Low Cost
6%
Easy to Use/Access
6%
Ability to Use Instead of Individual Bonds
3%
Trade Volume Growth Since 2008
Total Asset Growth Since 2008
Source: Greenwich Associates 2015 U.S. Fixed Income ETF Study
Fund assets and trading volume compiled from Bloomberg. Trading volumes based on cumulative monthly ADV from the period 12/31/2007– 12/31/2014. “Five largest credit ETFs” determined by ranking
the total net asset value of the funds as of 12/31/14.
Greenwich Associates
10
More Cost Effective Beta than Derivatives
Given liquidity issues, investors have looked elsewhere for fixed income
exposure, primarily derivatives.
•
•
•
•
ETFs offer another option to
investors using derivatives to gain
fixed income exposure.
Bond ETFs as Substitutes for Derivatives
Use of Derivatives (Credit Default
Swaps, Treasury Futures, Total Return
Swaps) to Gain Fixed Income Exposure1
61% believe S&P 500 ETF provides
more cost effective beta exposure
than S&P 500 future.
43% have shifted to ETF from
derivatives in the past year.
Would Consider Using FixedIncome ETFs as Alternative to
Gain Fixed Income Exposure2
No
42%
No
72%
Yes
28%
Yes
58%
15% will replace existing fixed
income futures position with ETF in
the next year.
Note: 1Based on 128 respondents in 2015. 2Based on 36 respondents in 2015 who use derivatives
Source: Greenwich Associates 2015 U.S. Fixed Income ETF Study
Greenwich Associates
11
Barriers to ETF Adoption
Investors not currently using fixed-income ETFs cite several common themes
behind their hesitations.
•
•
•
Despite asset growth, perceptions of
limited liquidity still persist.
Specific events add fuel to concerns
about liquidity when it is needed
most.
Reasons Institutions Don’t Currently Use
Fixed-Income ETFs
Constant Maturity Profile of Many ETFs
vs. Declining Maturity of Bonds
Internal rules and guidelines have yet
to evolve at certain organizations.
40% of those who feel uncomfortable
trading ETFs attribute that feeling to
a lack of understanding of the
product.
28%
Internal Limits
27%
20%
Investment Guidelines
Expenses
•
48%
Low Trading Volumes or Assets
Lack of Understanding/Familiarity
15%
12%
Regulatory Limits
8%
ETFs Not Supported on Trading/PM
Platform
8%
Note: Based on 60 respondents: 10 institutional funds, 22 investment managers. 21 RIAs, and 7 insurance companies in 2015.
Source: Greenwich Associates 2015 U.S. Fixed Income ETF Study
Greenwich Associates
12
Institutional Fixed-Income ETF Outlook
13
Shifting Fixed Income Dynamics
ETF demand likely to mirror broader shifts in institutional fixed income product
demand.
Expected Changes to Fixed Income Sector
Allocations Over the Next Year
Proportion of institutions expecting allocation to:
•
Institutional portfolios
diversifying / shifting toward
specialty products, largely in
search of yield in low interest
rate environment.
Decrease
Short Duration or Rate Hedge
7%
•
Likely to see increasing
demand for new approaches,
such as „smart beta‟.
Role for fixed-income ETFs in
multi-asset class portfolios, a
growth segment.
9%
International Developed
9%
1%
Municipal
Asset-Backed
23%
5%
Investment-Grade Credit/Corporate
U.S. Treasuries
24%
9%
High Yield
Emerging Markets
•
Increase
19%
22%
20%
15%
14%
14%
4%
9%
Note: Based on 128 responses: 50 institutional funds, 37 investment managers, 27 RIAs, and 14 insurance companies in 2015.
Source: Greenwich Associates 2015 U.S. Fixed Income ETF Study
Greenwich Associates
14
Increasing Comfort Trading Fixed-Income ETFs
Large-scale trades are becoming increasingly common among institutional
investors.
Experiential Feedback
Largest Single Trade Using a Fixed-Income ETF
33%
31%
Likelihood to
Trade Again
98%
Satisfied with
Experience
17%
93%
12%
7%
Comfortable
Trading ETFs
92%
More than
$100 million
$51-$100
million
$11-$50
million
$6-$10 million $0-$5 million
Note: Based on 60 respondents: 10 institutional funds, 21 RIAs, 22 investment managers, and 7 insurance companies in 2015.
Source: Greenwich Associates 2015 U.S. Fixed Income ETF Study
Greenwich Associates
15
Fixed-Income ETF Forecast
Investor expectations suggest further expansion of ETFs in the years ahead.
Expected Use of Bond ETFs Over Next 12 Months
Expected increases or decrease1
Increase
24%
About half of institutions not currently
using ETFs are considering use in the
next twelve months.
•
Greatest growth channels: insurance
and asset managers.
•
Expect continuation of current trends:
Of those expecting to increase
expected magnitude of change2
Over 20%
9%
16-20%
18%
11-15% 0%
Stay
the
Same
76%
•
6-10%
27%
 Greater comfort / familiarity
 Eroding concerns with greater
liquidity
1-5%
45%
 Broader applications
 Compliment to bonds
 Replacement of derivatives
Note: 1Based on 58 respondents in 2015, 0% expected to decrease bond ETF use. 2Based on 11 respondents in 2015 who plan to increase use of bond ETFs in next 12 months.
Source: Greenwich Associates 2015 U.S. Fixed Income ETF Study
Greenwich Associates
16
Leading Fixed-Income ETF Providers
A select few have garnered the attention of institutional investors.
Key Selection Criteria
Preferred Fixed-Income ETF Provider
Investment Mangers
•
Matches exposure needed
•
Liquidity / trading volume
•
Expense ratio
•
Performance / tracking error
•
Fund company
•
Benchmark used
•
AUM
•
Breadth of ETF offerings
50%
iShares/Blackrock
Vanguard
22%
State
Street/SPDRs
Other
17%
12%
Institutional Funds
iShares/Blackrock
50%
Vanguard
25%
PIMCO
13%
Other
13%
Note: Based on 46 respondents expressing a preference: 8 institutional funds, 18 investment managers, 14 RIAs, and 6 insurance companies in 2015.
Source: Greenwich Associates 2015 U.S. Fixed Income ETF Study
Greenwich Associates
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Conclusions
18
Key Takeaways
1
No change to
growth drivers
2
• Liquidity challenges will persist.
• Awareness / comfort levels will rise.
• Hesitations about liquidity will erode.
Institutional
market remains
in growth phase
• Shifting uses from tactical to strategic.
• A liquidity complement to bonds.
• A replacement for derivatives.
Growth trends to
watch
• Broadening use in insurance channel.
• Product innovation to meet client needs.
• Growth of fixed-income ETFs in global markets.
3
Greenwich Associates
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Contact Information
UNITED STATES
CANADA
JAPAN
Greenwich Associates
6 High Ridge Park
Stamford, CT 06905
USA
Tel: +1 203.625.5038
Greenwich Associates Canada
14 Prince Arthur Avenue
Suite 208
Toronto, Ontario
Canada M5R 1A9
Tel: +1 416.925.0197
Greenwich Associates Japan K.K.
8-6-9-414 Akasaka
Minato-ku, Tokyo 107-0052
Japan
Tel: +813.3475.5212
ASIA
Javelin Strategy & Research
4301 Hacienda Drive, Suite 550
Pleasanton, CA 94588
USA
Tel: +1 925.225.9100
1220 Sheppard Avenue East,
Suite 201
Toronto, Ontario
Canada M2K 2S5
Tel: +1 416.493.6111
Greenwich Associates Singapore
137 Amoy Street
#03-05 Far East Square
Singapore, 049965
Tel: +65.6236.0142
EUROPE
Greenwich Associates UK
90 Basinghall Street
1st Floor
London, EC2V 5AY
United Kingdom
Tel: +44.207.726.9400
Andrew McCollum
Managing Director
Direct: +1 203.625.5018
Email: [email protected]
© 2015 Greenwich Associates, LLC. Javelin Strategy & Research is a division of Greenwich Associates. All rights reserved. No portion of these materials may be copied,
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Trends in Institutional Investor
Use of Fixed Income ETFs
Q&A
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