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Multi-Use ETFs For Multi-Asset Strategies

In a global survey, institutional investors reveal a penchant for using ETFs in strategies that span asset classes.

The proliferation of ETF usage by institutional investors globally has widened with more frequent inclusion in multi-asset strategies.

Multi-asset managers – which, by definition, invest across asset classes in an effort to achieve particular outcomes such as growth, income, or risk mitigation – see ETFs as especially useful for their transparency (58%), trading flexibility (55%), liquidity (54%), and transaction cost efficiency (53%) according to 362 asset managers and hedge funds participating in a global survey conducted by Institutional Investor (“Managing Market Volatility in 2021”). Overall, the study had 766 institutional investment decision makers, including asset allocators.

Growth of multi-asset strategies accompanied by growth of ETFs

Nearly all asset managers in the study employ multi-asset strategies, which as their name suggests, allow portfolios to be managed using a range of asset classes, sectors, and styles. The wide variety and number of ETFs available today make them anatural fit in multi-asset strategies, and institutional investors in the study say they sometimes deploy ETFs as a 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%) – likely because transparency has become increasingly important to institutional investors.

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

ETFs used to replace or complement derivatives in multi-asset strategies

According to the survey, many managers see opportunities to replace or complement derivatives and individual securities with ETFs in multi-asset strategies, providing precise exposure.

To 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 – which, according the survey, is something a majority of institutional investors expect to continue for the next 18 months.

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

“In some separate accounts where we’re not allowed to use derivatives and we want liquidity, we will use ETFs,” said anther portfolio manager who participated in the survey.

Quick market access (63%) and liquidity (62%) are the primary reasons institutional investors use ETFs in the role of derivatives, but more than half (55%) cite a reason unique to the derivative scenario: avoidance of derivative analysis and counterparty negotiation required for single transactions.

Derivatives and ETFs aren’t necessarily an either/or proposition for institutional investors, and how they might use both depends on the scenario. Queried during the survey on their preference for derivatives versus ETFs in various applications, 612 eligible survey respondents expressed support for complementary strategies that include both ETFs and derivatives – 52% use both derivatives and ETFs for tactical adjustments to their portfolios, and 48% use both during transitional periods between asset managers. For those who don’t use ETFs in place of or alongside derivatives (n=134), the reason is typically regulatory or organizational restrictions (87%).

Download the report Managing Market Volatility in 2021: What institutional investors did in 2020 – and what they learned.


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