Managers want to know where ETF demand is coming from – and finding out isn’t easy
The ease with which ETFs are traded makes them an ideal vehicle for those seeking inexpensive, easy diversification. This has drawn investors of all sorts from across the world — which opens up a new challenge for providers.
Despite the ETF industry’s growing popularity, there is little information available on investor type, size, location, and the products they buy, reported the Financial Times. That makes it difficult for managers to determine which investors are purchasing their ETFs, and which ones are buying from the competition.
“It can feel as if someone has dropped a bag of money outside the front door and then run off,” Frank Spiteri, head of distribution at London-based ETF Securities, told the Times.
Because of their low cost, ETFs are generally accepted to appeal to retail investors; however, institutional investment is becoming more significant. According to ETFGI co-founder Deborah Fuhr, the number of institutional investors using ETFs has jumped 44% over the past five years. Looking at regulatory filings from more than 70 countries, ETFGI found 4,450 institutional investors and more than 8,000 mutual funds that held at least one ETF last year.
ETFGI’s global ownership survey identified Bank of America Merrill Lynch, which held US$100 billion in ETFs, as the largest institutional ETF investor. Accounting for another US$256 billion were Wells Fargo, Morgan Stanley, Goldman Sachs, UBS, BMO, JPMorgan and Citigroup — all of which act as market makers as well as investment advisors. In addition, the report tagged four hedge funds with a total of US$1 billion in ETFs: Passport Capital, Citadel, Two Sigma and Parallax Volatility Advisers. Japan’s central bank also had significant holdings.
As the ETF business continues to grow —US$434 billion has been pumped into ETFs in the eight months through August, surpassing the US$391 billion tallied over the whole of 2016 — managers are becoming more interested in slicing the market to find potential clients.
“This issue [of identifying key client segments and geographies] is compounded when looking to enter an area of the market that is relatively undeveloped, such as smart beta products,” said Nick King, head of ETFs at UK-based Fidelity International.
Bridging the information gap involves extreme data mining, with some specialists getting paid more than US$15,000 to dig through share registers from custodians for data on just one ETF. According to ETF Securities’ Spiteri, information from other sources like Bloomberg and registers held by depositories is also essential for managers, and market intelligence from other sources helps.
This type of market research is particularly crucial given the amount of institutional wealth that’s ready to be tapped. According to a study of more than 180 institutional investors by Greenwich Associates, guidelines restricting non-users from investing in equity ETFs dropped from 20% in 2015 to 9% last year; over the same period, similar restrictions on bond ETF investment among non-users fell some 25% to reach 19%.
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ETF portfolios making waves in the market
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Despite the ETF industry’s growing popularity, there is little information available on investor type, size, location, and the products they buy, reported the Financial Times. That makes it difficult for managers to determine which investors are purchasing their ETFs, and which ones are buying from the competition.
“It can feel as if someone has dropped a bag of money outside the front door and then run off,” Frank Spiteri, head of distribution at London-based ETF Securities, told the Times.
Because of their low cost, ETFs are generally accepted to appeal to retail investors; however, institutional investment is becoming more significant. According to ETFGI co-founder Deborah Fuhr, the number of institutional investors using ETFs has jumped 44% over the past five years. Looking at regulatory filings from more than 70 countries, ETFGI found 4,450 institutional investors and more than 8,000 mutual funds that held at least one ETF last year.
ETFGI’s global ownership survey identified Bank of America Merrill Lynch, which held US$100 billion in ETFs, as the largest institutional ETF investor. Accounting for another US$256 billion were Wells Fargo, Morgan Stanley, Goldman Sachs, UBS, BMO, JPMorgan and Citigroup — all of which act as market makers as well as investment advisors. In addition, the report tagged four hedge funds with a total of US$1 billion in ETFs: Passport Capital, Citadel, Two Sigma and Parallax Volatility Advisers. Japan’s central bank also had significant holdings.
As the ETF business continues to grow —US$434 billion has been pumped into ETFs in the eight months through August, surpassing the US$391 billion tallied over the whole of 2016 — managers are becoming more interested in slicing the market to find potential clients.
“This issue [of identifying key client segments and geographies] is compounded when looking to enter an area of the market that is relatively undeveloped, such as smart beta products,” said Nick King, head of ETFs at UK-based Fidelity International.
Bridging the information gap involves extreme data mining, with some specialists getting paid more than US$15,000 to dig through share registers from custodians for data on just one ETF. According to ETF Securities’ Spiteri, information from other sources like Bloomberg and registers held by depositories is also essential for managers, and market intelligence from other sources helps.
This type of market research is particularly crucial given the amount of institutional wealth that’s ready to be tapped. According to a study of more than 180 institutional investors by Greenwich Associates, guidelines restricting non-users from investing in equity ETFs dropped from 20% in 2015 to 9% last year; over the same period, similar restrictions on bond ETF investment among non-users fell some 25% to reach 19%.
For more of Wealth Professional's latest industry news, click here.
Related stories:
ETF portfolios making waves in the market
Why more stock-pickers are studying ETF investment
