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Heightened Volatility Requires Nimble Portfolio Management

ETFs could play a key role in achieving that flexibility, according to a new global survey.

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Managing Market Volatility Chapter 2

Managing Market Volatility Chapter 2

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If Jack be nimble and Jack be quick, Jack must be an institutional investor, according to the results of a new global survey of 766 institutional investment decision makers at insurers, endowments, family offices, foundations, pensions, and asset management firms. The survey was conducted by Institutional Investor, and the accompanying report, Managing Market Volatility in 2021: What institutional investors did in 2020 – and what they learned, reveals that nimble portfolio management is one of the most important things to investors as they face the possibility of ongoing heightened volatility during 2021.

Several noteworthy traits of ETFs – liquidity, transparency, and efficiency – have contributed to growth of the funds over the years, and it seems likely those attributes will continue to be the main reasons institutional investors use ETFs. Among all respondents in the survey, 68% expect to reposition their portfolio for continued heightened volatility, in part by leveraging those core characteristics of ETFs.

Speed – a combination of ease of use and timely asset exposure – is part of what makes ETFs efficient to use, and it is highly desired by the 49%1 of survey respondents who place more importance on the ability to quickly alter portfolio holdings than they did one year ago. The expectation of prolonged volatility puts a premium on liquidity, too, with 29%2 of survey respondents saying it is more important now than it was a year ago. Transaction costs – another aspect of efficiency – are also more important, according to 22%3 of respondents.

Mark Barnes, Head of Investment Research, Americas, at FTSE Russell, underscores the importance of speed and efficiency in volatile markets. He explains, “Investors need to monitor the underlying investment environment and be able to implement their changing allocation views rapidly and efficiently. ETFs that seek to track well-understood and transparent indexes that represent entire segments, such as the Russell 2000, or specific styles, such as the Russell 2000 Value or the Russell 2000 Growth, allow for efficient implementation because they are readily available and liquid.4 The recent performance of U.S. small-cap stocks and current market conditions have further underscored the need for institutional investors to have access to indexes that can help them fine-tune their investments.”

ETFs in multi-asset strategies

The wide variety and number of ETFs available today make them a natural fit in the multi-asset strategies of 65% of asset managers5 who participated in the survey, and many respondents say they sometimes deploy ETFs to complement or substitute for individual securities or derivatives.

The top reason asset managers cite for using ETFs in their multi-asset strategies is the transparency of the underlying holdings (58%)6– likely because a broader trend of transparency has become increasingly important to institutional investors. Patrick Ryan, Head of Multi-Asset Solutions at Madison Investments, regards transparency as a key to achieving the type of speed that investors desire in modern markets. “ETFs provide the critical elements needed to successfully execute our active multi-asset strategies,” he says. “Once we identify an attractive macro opportunity, ETFs possess the transparency needed for a rapid turnaround from due diligence to investment. In today’s fast changing markets, the ability to execute ideas quickly increases alpha potential and portfolio efficiency.”

Along with the transparency mentioned by Ryan, the asset managers in the survey, which included hedge funds, also appreciate the trading flexibility (55%), liquidity (54%), and cost efficiencies (53%) that ETFs bring to their multi-asset strategies.7

“As a multi-asset investor, there’s not always an actively managed strategy to access every asset class that I want access to,” said a portfolio manager interviewed as part of the survey. “Sometimes ETFs are the only way to get exposure to the asset class I want, and that combined with their liquidity makes them an easy choice.”

How investors use ETFs alongside derivatives

To potentially help meet return objectives in a low-yield, high-valuation environment, institutional investors and their managers sometimes use derivatives and leverage to avoid concentrating risks in traditional equities. The combination of hedge and leverage can be especially useful during heightened volatility.

Trading over-the-counter (OTC) derivatives can be opaque and involves counterparty risk in a largely unregulated venue. Avoiding that risk is a key reason that many institutional investors use ETFs in combination with or instead of derivatives. Among respondents, 82%8 say they already use or are considering using ETFs as a substitute for (or complement to) derivatives.

In certain cases, ETFs are useful when derivatives are completely off the table. “In some separate accounts where we’re not allowed to use derivatives and we want liquidity, we will use ETFs,” said a portfolio manager interviewed for the survey.

Overall, quick market access (63%) and liquidity (62%) are the primary reasons respondents said ETFs work well alongside or as a replacement for derivatives, but more than half (55%) cite a reason unique to the derivatives scenario: the avoidance of derivatives analysis and counterparty negotiation required for single transactions.9

Derivatives and ETFs aren’t necessarily an either/or proposition for investors, and how they might use both depends on the scenario. Among survey respondents, 52% use both derivatives and ETFs for tactical adjustments to their portfolios, both during transitional periods between asset managers (48%) and when rebalancing their portfolios (33%). Interestingly, 32% of investors said they use ETFs exclusive of derivatives during transition periods.10

Download “Nimble Portfolio Management Evolves With Expectations of Prolonged Volatility,” the second chapter of Managing Market Volatility in 2021: What institutional investors did in 2020 – and what they learned.

1 Of 692 respondents.

2 Of 692 respondents.

3 Of 692 respondents.

4 ETFs allow timely market access because they can be traded during market hours, unlike indexed mutual funds, for example, which can be traded only after market closing. Such ready access to the market contributes to the overall liquidity profile of an ETF, along with composition of the ETF, the trading volume of the securities that make up the ETF, and the trading volume of the ETF itself. Not all ETFs have the same level of liquidity.

5 34% of total respondents. Total respondents = 766.

6 Of 341 respondents.

7 Of 341 respondents.

8 Of 746 respondents.

9 Of 612 respondents.

10 Of 612 respondents.


Carefully consider the Funds’ investment objectives, risk factors, and charges and expenses before investing. This and other information can be found in the Funds’ prospectuses or, if available, the summary prospectuses which may be obtained by visiting www.iShares.com or www.blackrock.com. Read the prospectus carefully before investing.

Investing involves risk, including possible loss of principal.

Fixed income risks include interest-rate and credit risk. Typically, when interest rates rise, there is a corresponding decline in bond values. Credit risk refers to the possibility that the bond issuer will not be able to make principal and interest payments. Non-investment-grade debt securities (high-yield/junk bonds) may be subject to greater market fluctuations, risk of default or loss of income and principal than higher-rated securities.

International investing involves risks, including risks related to foreign currency, limited liquidity, less government regulation and the possibility of substantial volatility due to adverse political, economic or other developments. These risks often are heightened for investments in emerging/developing markets and in concentrations of single countries. Funds that concentrate investments in specific industries, sectors, markets or asset classes may underperform or be more volatile than other industries, sectors, markets or asset classes and the general securities market.

A fund’s use of derivatives may reduce a fund’s returns and/or increase volatility and subject the fund to counterparty risk, which is the risk that the other party in the transaction will not fulfill its contractual obligation. A fund could suffer losses related to its derivative positions because of a possible lack of liquidity in the secondary market and as a result of unanticipated market movements, which losses are potentially unlimited. There can be no assurance that any fund’s hedging transactions will be effective.

Transactions in shares of ETFs may result in brokerage commissions and will generate tax consequences. All regulated investment companies are obliged to distribute portfolio gains to shareholders. There can be no assurance that an active trading market for shares of an ETF will develop or be maintained.

Shares of ETFs may be bought and sold throughout the day on the exchange through any brokerage account. Shares are not individually redeemable from an ETF, however, shares may be redeemed directly from an ETF by Authorized Participants, in very large creation/redemption units.

This information should not be relied upon as research, investment advice, or a recommendation regarding any products, strategies, or any security in particular. This material is strictly for illustrative, educational, or informational purposes and is subject to change.

The iShares and BlackRock Funds are distributed by BlackRock Investments, LLC (together with its affiliates, “BlackRock”).

This study was sponsored by BlackRock. BlackRock is not affiliated with Institutional Investor or any of their affiliates.

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