By Joel Kranc
It’s been more than 30 years since exchange traded funds (ETFs) started making its mark in individual investors’ portfolios. Their steady growth rate has seen them account for about 30% of daily trading volume in the US, according to “Global ETF Market Facts,” published by Nasdaq.
At the institutional investment level, pension funds and larger investors also are adopting these investment vehicles. A Brown Brothers Harriman 2023 Global ETF Investor Survey showed that out of 325 respondents with more than $1 billion in assets under management, more than half have more than 25% of their portfolios in ETFs.
An S&P Dow Jones report showed that ETF assets in U.S. and Canadian pension plans, endowments and other institutions surged 22% in 2023 amid the year’s bull market, boosting the total under management among these organizations to $56 billion.
Investments in ETFs by “asset owner” institutions, which also include sovereign wealth funds and foundations, have quadrupled over the past decade, with most of the growth happening in the past three years, according to the report.
ETFs Take Off
Larger institutions migrated to ETFs from mutual funds largely due to the low management fees and broad product offerings, according to S&P. Pension plans, unlike employer-sponsored 401k plans, can easily hold ETFs and individual stocks.
“In Canada alone, if I think back over the last 10 or 15 years, the annual growth rates of the business of ETFs is anywhere between 10 to 30% per year. That’s probably unrivaled from any type of investment you would see, and it’s been very persistent,” says Pat Chiefalo, Head of ETFs and Indexed Strategies with Invesco Canada.
“Year after year, you see a continued demand for these type of products. Now, with that, you’ve seen a proliferation in products themselves,” he adds. “The type of product, active classes, different types of exposures, and the number of ETF providers. In terms of adoption, it’s clear that there’s been broader adoption in the retail space from advisors and individual investors, but you can see from some of the trading characteristics that have the growth, institutional investors have also taken hold in leveraging the vehicle.”
Other reasons institutions may want to look at ETFs include enhancing portfolio liquidity, ease of use, depth and breadth of product offering and improving performance.
“When it comes down to pension funds, I think it a little bit depends on the side of the institution you’re talking about,” explains Chiefalo. “Larger pension funds in Canada would be very selective and would be more opportunistic in their use of the ETFs. The types of ETFs that they’re looking at would typically be some of the largest and some of the most liquid exposures you can find either anywhere in the country or anywhere in the world.”
He cites two examples of what this looks like: First, U.S.-based Northwestern Mutual made a multi-billion dollar trade into one of INVESCO’s US ETFs.
“The US ETF is very large, very liquid, and that kind of represents the typical trade institutions will make. It was $2.7 billion. The ETF that they traded to was our equal weight ETF, and with a market cap that ETF of $54 billion.”
A second example occurred in 2021. “We launched several multi-factor ETFs and we had the municipal employee retirement system of Michigan make an immediate sizable investment into those vehicles of at least a billion dollars.”
Eagle Capital Management, whose clients include pension funds, endowments and foundations, launched its first ETF, the Eagle Capital Select Equity ETF with $1.8 billion in assets.
Appetite for Risk
Last year, Chiefalo says investors were in more of a “risk-off” mode. “Given the market was risk-off, large investors were looking for cash, rates were rising, and a floating rate product certainly fit that bill, and so we saw a huge demand into that product.”
This year, things are changing slightly, given that inflation has come down somewhat. “Now, interestingly, as we came into the end of 2023 and into 2024, with discussions and conversations about rates and inflation being a little bit more under control, we saw a huge ‘risk-on’ appetite. And this year, some of our biggest, most successful product in terms of flows has been our each of equal weight. There’s been more of an ‘equity-on’ type of market,” he adds.
“It’s more ‘risk-on’ [and it’s] been a little calmer. I would say you with when rates might begin to drop with where inflation is today exactly I think we’ve seen a little bit of a pause in terms of risk appetite, however.”
Going forward, it appears ETF appetites remain strong. The Brown Brothers Herriman survey said 89% of investors plan to maintain or increase their allocation to ETFs over the next 12 months. As investors adapt to volatility, they are diversifying their portfolios and adding more innovative products. They conclude by stating that given the enhanced investor education and continual product evolution within ETFs, the ETF market could be worth more than $30 trillion by 2033.
