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ETFs Gaining Traction Among Canadian Institutional Investors


Mirroring the growing sentiment in the U.S., institutional investors in Canada are also embracing exchange traded funds and are expecting to increase allocations to the investment vehicle in the years ahead.

According to a Greenwich Associates study, titled Versatility Fuels ETF Growth in Canadian Institutional Portfolios, the share of Canadian institutional funds using ETFs increased to 12% in 2012 from 11% in 2011. Looking at institutional funds with over $1 billion in assets under managements, 21% of larger institutional funds utilized ETFs in 2012, compared to 15% in 2011. [More Institutional Investors Seen Using ETFs]

“Given the simplicity and flexibility of exchange traded funds, we’re not surprised that institutional investors are turning to ETFs more regularly to achieve their investment goals,” Greg Walker, Managing Director, Head of iShares Institutional Business, BlackRock Canada, said in a press release. “As indicated in the Greenwich survey, institutional use of ETFs is on the rise in Canada as institutional funds, investment managers and insurance companies discover new functions for these products within their investment portfolios.”

The study found that there are two reasons to increased use among institutional investors: 1) institutional investors are experimenting more with ETFs as the ETF universe expands. 2) once institutions use ETFs, they are more apt to pick up other fund products.

About 45% of Canadian institutional funds expect to increase allocations to ETFs by 2014, and no funds say they want to cut back on ETF usage. Additionally, asset managers using ETFs are also going to boost allocations to ETFs, with 31% showing an interest in moving more into ETFs.

Around 70% of institutions use ETFs for equity exposure, specifically for Canadian and U.S. stocks. About 83% of asset managers, though, use equity ETFs for international market exposure. On the fixed-income side, around 50% of institutional funds and 45% of investment managers use ETFs in domestic fixed income and 28% of respondents use ETFs for international fixed-income exposure.

More institutional investors are using ETFs for strategic long-term and tactical short-term portfolio allocations.

“Even though the study found an almost 50-50 split in the nature of ETF usage, it is interesting to note that the most common application was the tactical nature of using the product as a tool to facilitate manager transition,” Walker added.

ETFs also provide exposure to a diversified basket of various asset classes. Recently, a third of institutions and asset managers have honed in on REIT ETFs and another third are usign ETFs for commodities.

“Canadian institutional investors are hungry for real estate exposure,” Greenwich Associates consultant Andrew McCollum said in a note. “ETFs offer a relatively efficient means of obtaining that exposure for smaller funds or for funds concerned about the risk and complexity of investing in real estate directly.”

For more information on the ETF industry, visit our current affairs category.

Max Chen contributed to this article.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.