In quite possibly unsurprising news for those following the exponential growth of the exchange-traded funds industry, BlackRock, Inc. (NYSE:BLK) says institutional investors are increasing their use ETFs.
BlackRock, the parent company of iShares, the world's largest ETF issuer, confirmed the findings in its 2015 Institutional Usage Report out Friday. The report provided insights into ETF usage trends across 814 pensions, foundations, endowments, asset managers, consultants and insurers, said BlackRock. According to the report's findings, managing volatility is a primary reason why so many institutional investors are boosting their use of ETFs.
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The Report's Findings
In 2015, across all client types, almost a quarter of respondents cited volatility as their main investment challenge. Asset owners such as consultants and pensions,foundations, and endowments were the largest client segment to report this as their main investment challenge, while far fewer asset managers and insurance companies appear to be concerned, said BlackRock.
Year-to-date, investors have poured $1.1 billion in new assets into the iShares MSCI Emerging Markets Minimum Volatility ETF (iShares Inc. (NYSE:EEMV)) and $2.9 billion into the iShares MSCI USA Minimum Volatility ETF (iShares Trust (NYSE:USMV)).
Smart Beta On The Rise
As other reports out this year support, BlackRock's 2015 Institutional Usage Report shows professional investors continue warming to smart beta ETFs. Nearly 20 percent of institutional investors surveyed by BlackRock are expected increase usage of smart beta ETFs next year.
Challenges addressing volatility suggest that clients are seeking efficient solutions such as minimum volatility strategies as well as other risk-adjusted smart beta strategies. While only 10 percent of respondents reported current allocations to smart beta ETFs, 19 percent reported that they are likely to invest in smart beta ETFs in the next yearthe largest expected increase out of any asset class in question, said BlackRock.
According to FTSE Russells first U.S. retail financial advisor market survey "Smart Beta: 2015 survey findings from U.S. financial advisors," 68 percent of financial advisors polled are using smart beta ETFs and 70 percent are using multiple strategic beta approaches.
BlackRock's iShares unit is one of the largest issuers of smart beta ETFs, thanks in large part to funds such as the iShares MSCI USA Momentum Factor ETF (iShares Trust (NYSE:MTUM)), ISHARES MSCI USA QUALITY FACTOR ETF (BMV: QUAL) and the ISHARES MSCI USA VALUE FACTOR ETF (BMV: VLUE).
Those ETFs have about $3.5 billion in combined assets under management, roughly $1.5 billion of which has flowed into the funds this year.
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ETFs As Vehicles For Beta
ETFs are also making inroads into territory previously dominated by futures contracts. Due to increased regulations, namely higher capital requirements, rolling futures contracts has become more expensive. As a result, some professional traders are turning to ETFs as an avenue for beta.
Futuresone of the traditional instruments of choice for institutional investors looking for betaface headwinds driven by the increased cost of capital applicable to banks under the Basel framework and the Volcker rule.
As a result, over the last 1215 months, many futures investors may have experienced a noticeable increase in the cost of rolling their contracts, causing them to seek lower-cost alternatives to futures, said BlackRock.
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