Most investors use ETFs primarily for asset allocation purposes, and that’s no different for the survey respondents. ETFs have been gaining ground as their fees have steadily come down over the past few years while the array of choice has been widening. ETFs are now a serious alternative to active funds for almost all asset classes. Currently, institutions that use equity ETFs invest about a quarter of total equity assets in ETFs on average.
The survey respondents use a variety of derivatives to access market beta, such as futures, swaps, and options, but are replacing these instruments with ETFs. About half of ETF users in the study, which was commissioned by iShares, plan to replace an existing equity futures position with ETFs in the coming year, and 40% say they will evaluate futures positions for potential replacement.
Most do this because they find ETFs more cost-efficient and easier to use, while some cite reasons of regulation or securities lending. Overall, 40% say they will further evaluate futures positions for potential replacement with ETFs.
But more than half of the institutions in the study—52%—report average ETF holding periods of a year or longer. That share is up nearly 10 percentage points from 2015, reflecting that growing numbers of institutional investors are using ETFs for strategic purposes too.
In fact, 55% of survey respondents who use ETFs say they use the products as part of their core allocation. ETFs are popular to gain strategic exposure to areas such as the (European) government bond market, as increasing numbers of investors active managers in this space are not worth their fees because of the low yields on offer.