European institutional investors are integrating exchange-traded funds (ETFs) more deeply into investment processes and strategies, according to a Greenwich Associates European ETF Study of 25 institutions. The challenges facing the sector include:

• the return of volatility to global capital markets,
• the looming shift to a rising-rate environment,
• the impending end of European Central Bank bond buying and
• the ongoing implementation of MiFID II and other new regulations.

The study found that ETF allocations have increased in asset portfolios, as institutions adopt strategies to meet the above challenges. As a result, ETFs are being introducing into a long list of functions that support their investment and portfolio management processes, says the Greenwich Associates report.

ETF growth areas

The report highlights higher use of ETFs in several areas:

• average ETF allocations among the institutions participating in the study increased to 10.3 per cent of total assets in 2017 from 7.7 per cent in 2016;
• there has been a rise particularly in the use of fixed income ETFs: the share of study participants investing in fixed income ETFs increased to 45 per cent in 2017 from 38 per cent in 2016;
• and the share of European asset managers buying ETFs for use in multi-asset funds increased to approximately 80 per cent in 2017 from 63 per cent in 2016.

ETFs: simple, versatile, cost-effective

The author of the report, Greenwich Associates' Andrew McCollum, said: “After multiple years of regular use, European institutions have found ETFs to be simple, versatile and cost-effective tools, and they are ramping up their investments at a rapid clip.”

And BlackRock's Fergus Slinger commented: “ETFs are the natural result of the evolution of the European financial market, where investors increasingly crave transparency, choice and value. MiFID II in particular, which mandates trade reporting, is helping to unveil the depth of liquidity in European ETFs and unlock new, creative ways for investors to build smarter portfolios.”

Growth to continue

The report concluded that ETFs are likely to remain on a growth trajectory through the coming year. Greenwich Associates projects that total global institutional investment in ETFs will see US $300 billion in flows annually by 2020.