This content is from: Innovation

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.



FOR U.S. INSTITUTIONAL INVESTOR USE ONLY.

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.

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.

iSHARES and BLACKROCK are trademarks of BlackRock, Inc., or its subsidiaries in the United States and elsewhere. All other marks are the property of their respective owners.

iCRMH1121U/S-1897108-1/3

Related Content