Hilary Corman
Worldwide indexed assets managed in exchange-traded funds and exchange-traded notes increased to $6.82 trillion as of June 30, up 42.1% from the previous year and accounting for about a third of total worldwide indexed assets tracked by Pensions & Investments’ annual survey of index managers.
And as ETF use increases, the vehicles continue to prove their usefulness.
Hilary Corman, the New York-based head of U.S. institutional for SPDR ETFs at State Street Global Advisors, said the accessibility of ETFs has given institutional investors expanded options for managing more of their assets in-house.
“That can range from broad, low-cost passive equity or fixed- income exposures, to more specific allocations in niche classes,” she said. Asset owners can add exposure to specific sectors or industries that interest them, Ms. Corman said, with low fees and ease of trading.
With ETFs, asset owners can build their own special-use portfolios, and Ms. Corman said SSGA’s insurance clients have made particularly creative use of ETFs during the past year.
“In the second quarter of 2021, a large health insurer used multiple ETFs as a liquidity tool to build cash reserves because they were thinking there would be higher than expected payouts due to COVID-19,” Ms. Corman said.
Meanwhile, a life insurance company “allocated ETFs to build scale in their underlying subsidiary accounts. They used some of our institutional fixed-income products,” she said.
SSGA remained the largest manager in P&I’s universe of index assets for non-affiliated insurance companies, with an 18% increase to $161.1 billion for the year ended June 30.
ETFs also give a broad range of investors expanded options for internal management, while maintaining the advantages inherent to ETFs, Ms. Corman said.
The SPDR and Blackstone senior loan ETF is an example, she said. “There’s a huge demand for loans and a desire for active managers who know how to manage them. So, the client can buy senior loans in an ETF wrapper that has great performance, due to the skill of Blackstone behind it,” Ms. Corman said.
The SPDR Blackstone Senior Loan ETF has attracted $5.9 billion of assets so far in 2021, according to SSGA, bringing its total assets under management to more than $8.1 billion as of Nov. 8.
John Delaney, a senior director, investments, and portfolio manager at Willis Towers Watson PLC in Philadelphia, said he hasn’t seen a dramatic increase in institutional investors managing their portfolio exposures through ETFs in 2021, but fixed-income managers have increased their use of ETFs as a liquidity tool when building client portfolios.
“What I mean by that is, on the fixed-income side, credit managers have begun to make more use of ETFs as a way to quickly get exposure to credit markets and duration while they’re trying to build out more specific security-level portfolios,” he said.
Using ETFs, Mr. Delaney said, gives the manager time to build out the portfolio on a more measured basis, over a longer period of time, to make sure they’re getting the best pricing on the issues they want to buy.
“We’ve seen this happen pretty regularly in credit markets coming out of March 2020 because liquidity continues to be somewhat challenged in the fixed-income market,” he said.
Mr. Delaney said conditions and regulations that followed the financial crisis have effectively decreased the amount of liquidity in the fixed-income market.
“So what I’d say we have concerns about is does every crisis from here on out become a liquidity crisis? Which is basically what happened in March of 2020. You couldn’t sell a number of different things so investors started selling down the high-quality things that they could sell because they needed to raise cash for benefit payments or needed to raise cash for other needs,” he said.
Mr. Delaney said the lack of liquidity led some investors to sell some of their most resilient holdings during the crisis period. The potential for unexpected liquidity crises is one reason ETFs, and passive holdings in general, will continue to be an important tool for institutional portfolios, he said.
“What I mean by that is that most investors probably want to have some sort of index or ETF investments on their equity side and their fixed-income side in the event we get another liquidity crisis and, for lack of a better term, pool their liquidity to make sure they have access to appropriate liquidity when they most need it,” Mr. Delaney said.
Carolyn Weinberg, a managing director and global head of product of the iShares and index investments business at BlackRock Inc. in New York, pointed to six major use cases of ETFs among BlackRock’s institutional clients in 2021: tactical asset allocation, strategic asset allocation, transition management, and use as cash equivalents, derivative substitutes and liquidity sleeves.
“The excess cash on balance sheets was so big that a lot of our institutions created portfolios, with a series of ETFs, that resemble their overlying portfolios but were liquid. So it’s cash-drag reduction and a liquidity sleeve. So they saw liquidity alpha and transaction alpha. That’s sort of where we saw the biggest expansion but we’ll see more and more investors using all six,” Ms. Weinberg said.
She has also been encouraged by the expanded use of ETFs with derivatives or as derivative substitutes in 2021. While equity ETFs have long been used vs. futures, Ms. Weinberg said more investors have been using a broader range of ETFs instead of a derivative, such as using fixed-income ETFs instead of credit default swaps.
“We’ve seen some very large transactions with ETFs as a derivative substitute this year, and in part from clients who hadn’t used our products before, so it’s an extension across use cases. And it’s an extension from the single-use ticker to many tickers, which is really exciting to see,” she said.
In looking toward the future, Ms. Weinberg expects ETFs to expand the options for sustainable investing, due to the accessibility, liquidity and lower transaction cost of ETFs.
“From an institutional perspective, we used to feel that the European markets were much more focused on this, partly from a regulatory and partly from a cultural perspective. But now, almost every client meeting, whether it’s in Asia, it’s in Europe, the U.S., or in Latin America, sustainability as a theme comes up,” Ms. Weinberg said.
Portfolios will continue to tilt toward sustainability as stakeholder preferences evolve, she said, such as Harvard University’s endowment moving its investments away from fossil fuels.
“We call it ‘a value alignment’ or ‘intentionality,’ where constituents or stakeholders want to see demonstrated intention toward an outcome in an institution’s investment book,” Ms. Weinberg said.
Although the desire for sustainable investing is growing, the meaning of “sustainable” and the desired portfolio impact is more personalized.
“A few years ago, institutions were asking for ‘ESG.’ Now, they’re much more specific. They’ll say, ‘I have decarbonization goals,’ and they may be different. They may have specificity in how to measure the decarbonization. We have clients who are focused on sustainable development goals, and they want to tilt their portfolios that way. Some of our clients may have diversity goals related to their investment portfolio and tilt that way. So it is no longer, ‘I would like to improve my sustainability scores across ESG.’ It’s very specific,” Ms. Weinberg said.
In-depth research is critical to creating index products to meet these diverse and evolving needs, she said. It is “acquiring the rights to certain datasets, evaluating the datasets, integrating them into our systems, incorporating them into our risk metrics and deriving insights to drive a portfolio that is customized to our institutional clients. It’s not indexed in the same way we think of an index. It is customized portfolios for institutions,” she said.
BlackRock managed $3.02 trillion in ETFs and ETNs as of June 30, a 32.46% increase over the previous year.
BlackRock was the largest manager of total worldwide indexed AUM in P&I’s universe, with assets rising 33% to $6.29 trillion over the year ended June 30.
Another theme with growing interest is digital assets.
Invesco Ltd. recently launched two digital asset ETFs, which Jennifer Kim, Invesco’s New York-based head of ETF specialists for the institutional channel, said “have piqued the interest of institutional clients, as thematic equity ETFs could serve as a vehicle to gain exposure to the overall digital assets ecosystem, rather than invest directly in cryptocurrency, where an investment committee or board may not yet feel comfortable investing.”
Although interest in digital assets, such as cryptocurrencies, may be growing among retail investors, institutional investors could face compliance or board approval issues with custody or clearing, she said.
“Getting exposure through an ETF in an equity wrapper allows CIOs and PMs to gain exposure to the digital asset space, yet not take on some of the operational complexity of having to buy directly into a new asset class. ETFs provide transparency, liquidity and operational efficiencies,” Ms. Kim said.
Invesco’s digital asset ETFs track equity indexes of companies in the cryptocurrency and blockchain space, while also maintaining an allocation to an investment vehicle that directly holds physical cryptocurrency.
According to the firm, the Invesco Alerian Galaxy Crypto Economy ETF had more than $13 million in assets as of Nov. 7, while the Invesco Alerian Galaxy Blockchain Users and Decentralized Commerce ETF had more than $6 million. Both ETFs were launched in October
