American institutional investors continued to like ETFs in 2015, which saw some $230 billion in new net flows, a record year according to BlackRock officials speaking at a Wednesday news conference.
The officials, who advise and help sell BlackRock iShares products to institutions, said asset managers, RIAs and insurance companies are increasingly using ETFs. They said there was little possibility the ETF boom will end in the short term.
Why?
They unveiled a new Greenwich Associates study sponsored by BlackRock that shows the asset numbers are strong. The report, “Institutional Investment in ETFs: Versatility Fuels Growth,” said that U.S. institutions now hold some $756 billion of the $2.1 trillion in U.S. ETF assets.
“That amount has steadily climbed over the past decade as institutional investors introduced ETFs over the past decade,” according to the report.
“We expect the industry to grow by 11 percent this year, which is what we have had over the past five years. We think 2016 will be another record year,” said Daniel Gamba, head of iShares Americas Institutional Business at BlackRock.
Greenwich Associates, which interviewed 183 institutional investors, asked why and how much they are using the product.
A little over a third of respondents plan to increase their use of ETF in the next year, while 35 percent plan to boost their allocation by 10 percent or more.
“Matching the exposure needed was the most important factor when selecting an ETF, as mentioned by 82 percent of the investors,” according to the survey.
“Other factors considered when selecting an ETF included liquidity/trading volume (76%), expense ratio (72%) and tracing error of the fund,” the survey said.
In interviews with the institutional investing pros, five primary factors were cited in the recent ETF growth:
- Institutions are finding new and increasingly strategic applications for ETFs.
- ETF use is expanding rapidly in fixed income.
- Institutions are using ETFs alongside derivatives.
- ETF providers are innovating with new strategies and approaches.
- Insurance companies are embracing ETFs.
Gamba added that institutions are using the product “to seek additional liquidity in their bond portfolios, to aim to outperform broad market returns via smart beta strategies and to make longer-term strategic allocations.” He said that another factor boosting ETFs are portfolio costs that are much lower than futures.
What could stop the exchange-traded product that has been going on for years?
Gamba said it could happen if someone put together a bad ETF and that led to a hostile regulatory climate.