Larger Institutions Drawn to Smart Beta ETFs

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Larger Institutions Drawn to Smart Beta ETFs

Despite the vast array of product offerings and investment solutions available in the institutional market, institutional investors managing less than $1 billion in assets continue to favor two product categories—individual securities and open-end mutual funds—while organizations managing at least $1 billion in assets report higher allocations to separate accounts, commingled funds and limited/private partnerships, evidence of the wider variety of investment strategies these institutions employ. However, one category that has enjoyed substantial growth of late is that of ETFs. In fact, 37% of institutions now use ETFs, up from just 26% two years ago.

While the vast majority of institutions are employing market cap index ETFs, one-third (33%) of pensions managing $250 million or more in assets are incorporating rules-based or smart beta ETFs in their institutional portfolios. Active ETFs are also used by roughly one-third of pensions investing in the product category. Among the roughly 4 in 10 non-profits employing ETFs, we see a stronger preference for market cap index products among larger institutions, while smaller non-profits are turning more frequently to active ETFs. That said, one-quarter (25%) of non-profits managing $250 million or more in assets are using rules-based/smart beta products and nearly that many are incorporating leveraged or inverse ETFs in their portfolios.

Types of ETFs Used

In the coming year, pensions managing assets of $250 million or more intend to increase their assets in leveraged/inverse ETFs while decreasing their holdings of both market cap index and smart beta products. Meanwhile, larger non-profits report the strongest interest in active ETFs and rules-based/smart beta strategies. As such, asset managers and ETF providers targeting the institutional space would be well served to hone their expertise and offerings to align with these areas of the greatest future demand potential.

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