Latest ETF news
Visit our ETF hub to learn more and explore in-depth data and comparison tools.
Institutional adoption of exchange-traded funds by asset owners such as pension funds and insurance companies has accelerated in Europe since 2020, according to BlackRock’s analysis of its iShares ETF holdings.
The value of iShares, which is held by Europe’s largest financial institutions, has grown at a compound annual rate of 29% since 2020, said the head of iShares sales to institutional investors in EMEA and head of European public sector sales. Kirst Kuypers said.
“This is a very fast growth rate,” he said.
He said the holdings database for large asset owners provides a high degree of transparency and allows BlackRock to have an accurate picture of iShares’ ownership.
Across 16 European countries surveyed by BlackRock, on average 40% of each country’s 10 largest pension funds own iShares ETFs. This number obscures some of the regional variation because in some countries, a large proportion of the largest pension funds hold ETFs.
When other large asset owners such as insurance companies are included, that ownership rises to 60%.
BlackRock’s view on the surge in interest from institutional clients is echoed by other market observers in Europe.
“Traditional institutional clients such as pension companies and insurance companies are increasingly making active use of our European ETF platform,” said the electronic over-the-counter market for trading fixed income products, ETFs and bonds. said Adam Gould, global head of equities at Tradeweb. Derived products.
Gould said the total notional amount attributable to financial institutions has increased by 104% over the past four years. “We have also seen a 75% increase in the number of pension and insurance companies trading ETFs on our platform,” he said.
Kuipers said there are a number of factors contributing to the increased enthusiasm for ETFs by institutional investors.
First, these vehicles demonstrated resilience to market shocks during the meltdown that accompanied the beginning of the pandemic. A significant increase in liquidity in the ETF market has also made a difference, he said, noting that global ETF assets under management have soared over the past decade from about $2.5 trillion to now $14 trillion.
Also, for certain fixed income ETFs, for example, significant cost savings may be achieved by trading the ETF rather than trading the underlying securities. Mr. Kuipers estimated that $50 million of iShares Core Euro Corp Bond Utility ETF (IEAC) trades in the past three months had a total expense ratio of 20 basis points, which is the lowest transaction cost of the underlying securities. It is calculated that the cost is 3bp compared to 27bp.
A similar size trade in the iShares Euro High Yield Corp Bond Usheets ETF (IHYG) could have achieved even greater cost savings, with an estimated TER of 50bp and an underlying The trading cost of the asset would have been 60bp, while the trading cost of the ETF would have been 5bp.
He said this advantage is important because when a financial institution wants to undertake a large transaction, say $500 million, economies of scale mean that it is cheaper to use a bespoke transaction that can be negotiated on a delegated basis. He added that it would disappear.
These cost differences may explain further trends Kuipers observed, such as smaller asset owners increasingly using ETFs in buy-and-hold strategies. But he said ETFs are being used to supplement mandates and have proven to be a cost-effective tool for balancing portfolios even among large financial institutions.
“They’re not doing everything in ETFs, but they want to be more active in ETFs,” Kuipers said.
BlackRock predicts that the transition from defined benefit plans to defined contribution plans will accelerate, and that this will lead to a surge in demand for ETFs among pension funds.
“There will be a new DC scheme,” Kuipers said. He added: “We expect new formations to choose to use ETFs. ETFs are particularly relevant for new DC schemes that need to be diversified from day one.”
Amin Rajan, chief executive of Create Research, a consultancy that works closely with the pension fund industry, said he was not surprised by BlackRock’s numbers.
He pointed to an additional factor driving pension fund adoption of ETFs, namely the significant shift from active management in the past to passive index investing.
He said his research suggested that about a decade ago, global pension funds held about 15-20% of their assets under management in passive funds of all types. That number has jumped to 35 to 40 percent.
The increasingly lower fees charged by ETFs has meant that they are increasingly becoming the vehicle of choice for pension funds over traditional index funds.
Additionally, Rajan said, “ETFs have become hedging tools because they can be moved in and out without significantly impacting the underlying stock prices.”
Kuipers said the sudden increase in interest from large asset owners is indicative of a transformation in the ETF market.
“First it was asset (management), then asset managers, and now it’s moving to asset owners,” he said.
