Invesco Built a Custom ETF for an Insurer — And More Like It Are Coming

With institutional use of ETFs growing, more investors are asking Invesco to create tailored funds, the company says.

June 16, 2020, Brazil. In This Photo Illustration The Invesco Lo

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Last week, Invesco launched a new fund, the Invesco MSCI Global Climate 500 ETF (KLMT), and it quickly attracted well over $1.5 billion — a strong start by most ETF standards. But this was not a typical ETF launch.

The inflows were unsurprising to Invesco. Varma, a Finnish pension insurer with a $65.5 billion investment portfolio, had been waiting for the launch and promptly invested $1.6 billion in the ETF, which was made for them. The insurance company also collaborated with MSCI to create the index to meet its specific investment parameters. It wanted a fund that supported the world’s transition to more sustainable sources of energy by tracking global companies that meet certain environmental and climate criteria, including a track record of reducing greenhouse gas and carbon emissions.

Timo Sallinen, head of listed securities at Varma, said in a statement that the new ETF helped the insurer meet its preferences and gave it more flexibility for investing the rest of its assets.

The bespoke index fund is also a prime example of how institutional investors are using ETFs differently than they were a decade ago, Emily Foote McKinley, head of institutional ETFs and models at Invesco, told Institutional Investor. A recent analysis by Invesco showed that over the past 10 years, the number of institutions that were reporting using ETFs doubled. Meanwhile, the number of funds (a measure of the different sectors and exposures) they were using was up 500 percent.

“ETFs have to make sense to them from an exposure standpoint, but also from a structure standpoint because they can get that exposure in truly any other vehicle. The ETF wrapper itself has to add something, and in this case it absolutely did,” Foote McKinley said about KLMT.

Varma wanted an ETF that met its sustainability needs, was domiciled in the U.S., and had the tax benefits that come with ETFs. But it prized something else even more.

“Probably the primary driver here is the liquidity of the vehicle,” Foote McKinley said. “Almost always the appeal to an institution of an ETF has to do with that liquidity component. If they can’t get liquidity out of the ETF, there are many other ways that they can go about getting that exposure.”

The potential for a diverse group of investors — anyone can buy an ETF — and improved liquidity is why pension funds, insurance companies, and other institutional investors are turning to the funds traded on exchanges like company stock. Better liquidity means they can invest quickly, opening up windows of opportunity they might otherwise miss out on. “You can get into an exposure intraday. You’re not RFP-ing, you’re not going through a consultant, you’re not onboarding and doing all of the paperwork with weeks, if not months, of lead time,” Foote McKinley said. “The ability to put on and take off a tactical play, or use an ETF for some precise exposure, is really important, especially in the markets that we’re in today and obviously the macroeconomic uncertainty.”

According to Foote McKinley, more institutional investors are engaging Invesco about using ETFs and creating bespoke ones, which at least anecdotally supports the asset manager’s research about the activity. But detailed information on the number of institutions that use of ETFs, and why, is opaque.

There is no source of aggregated information about the ETF holdings of institutional investors and there might never be. Foote McKinley said a number of her clients like that ETFs obscure their investments in certain companies from the companies themselves and from other investors. Institutions can invest in an ETF without others knowing, too. Changes they make to their general allocations are often periodically reported to the public, but most don’t disclose the specific investments in companies and funds they are making in a timely manner, if at all.

“That’s part of the appeal. They don’t want people to know that they’re holding a given ETF… that does make it a little challenging for all of us, but it’s just probably a feature of that structure,” Foote McKinley said.