Annual Survey Suggests Growing ETF Investor Sophistication

April 01, 2019

Every year, Brown Brothers Harriman conducts a survey about ETF usage by investment professionals. For the past few years, it has had a decidedly global tilt, with respondents based not just in the U.S. but in Europe and Greater China. ETF.com, publisher of ETF Report, has partnered with BBH on the survey for the past several years. For the first time, the results have been compiled into one unified report, allowing readers to compare responses across regions and at a global level.

Significant & Growing
Of the 300 respondents—who were a global mix of institutional investors (30%), financial advisors (50%) and fund managers (20%)—42% said that 11-25% of their assets under management (AUM) were invested in ETFs (Figure 1A). Another 25% said 26-50% of their assets were invested in ETFs, while 11% said they had more than 50% of their assets invested in ETFs, with 2% holding all of their assets in ETFs. Even more importantly, across the board, roughly 60% of the respondents in each region said they expected to increase their allocation to ETFs to increase over the next 12 months (Figure 1B).

Choosing ETFs
When it comes to what investors want in ETFs, historical performance was listed as the top selection criteria, taking precedence over things like expense ratio, index methodology and ETF issuer. Despite investors being told ad nauseum that past performance is no guarantee of future results, historical performance can be relevant when investors concerned with diversification, for example, are looking at how to position various asset classes in their portfolios. Rather than suggesting ETF investors are chasing returns, the prioritization of historical performance over expense ratio is likely fully in step with the increasing levels of sophistication that ETF users have exhibited over the years.

Supporting that is the fact that, globally, 40% of respondents said they would invest in an ETF with less than $24 million in AUM. Previously, $50 million and $100 million had been more common “rule of thumb” minimums, but remember that these are investment professionals, and the number suggests they’re growing more comfortable perhaps working with capital market desks to execute tricky trades.

Looking For More
When it came to areas where investors are looking to see more ETFs, active management and smart beta were among the top choices for all three regions, while the U.S. and Greater China both put ESG choices near the top of their wish lists. The absence of ESG from the top picks for Europe is likely due to the region’s much longer history with socially responsible investing.

Regarding asset classes where investors would like to see more offerings, the top-tier choices were remarkably similar across regions, with fixed income a top priority, followed by U.S. equity and commodities (Figure 2).  Fixed income is a much larger asset class in value than equities, so this isn’t surprising.

Most fixed-income ETFs just brush the surface of the space, and there are countless additional ways to slice the market and hone in on different return streams. Despite the size of the fixed-income space, there are far fewer ETFs to represent it. In the U.S.—the most mature ETF market in the world—there are more than 1,500 listed equity ETFs and less than 400 listed fixed-income ETFs.

Further, given the global spike in volatility, respondents may have greater interest in fixed-income ETFs for purposes of risk management. Nearly half of participants said they would buy fixed-income ETFs to address the issue of heightened market volatility, the highest-rated answer for all three regions.

However, at the global level, investors have concerns about trading fixed-income ETFs, with liquidity of the underlying the top concern for 28% of respondents; trading volume the top concern for 27% of respondents; and tracking error the top concern for 22%.

Smart-Beta ETFs
Smart beta is clearly at the top of investors’ minds, with only 16% of respondents globally saying they did not purchase a smart-beta ETF in the preceding 12 months. Of the remainder who did, 29% said they purchased them primarily to replace an actively managed mutual fund, and 25% said they used it to replace an index mutual fund. And 15% said they bought a smart-beta ETF to replace core index exposure, while another 15% said they allocated new investment dollars to the new fund.

The future is bright for this ETF area—43% of U.S. participants in the survey said they intended to increase their allocation to smart-beta ETFs; 50% of European respondents agree; and 38% in Greater China said the same thing. thing. Globally, that worked out to 44% of respondents looking to increase their exposure to smart-beta ETFs (Figure 3).

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