Managing Market Volatility in 2021 - What institutional investors did in 2020 - and what they learned - iShares
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Managing Market
Volatility in 2021
What institutional investors did
in 2020 – and what they learned
January 2021
iCRMH0121U/S-1459151-1/22
Contents
3 Executive Summary and Methodology
5 Liquidity and Speed Prove Key in Market Uncertainty
9 Nimble Portfolio Management Evolves With
Expectations of Prolonged Volatility
14 Use Cases for ETFs
17 A Preference for Large, Liquid ETFs Linked to
the Optimal Benchmark
Page 2
iCRMH0121U/S-1459151-2/22
Executive Summary
In Q3 2020, Institutional Investor conducted a global survey of 766 institutional investment decision
makers at insurers, endowments, family offices, foundations, pensions, and asset management
firms regarding their experiences and actions during severe market volatility in the early part of
2020. Survey data citations throughout this report refer to questions answered by 760 or more
respondents unless noted otherwise.
The timing of the survey is noteworthy, as respondents had already been through the worst of the
initial disruption caused by the Covid-19 pandemic. This allowed their answers to reflect on both
how their portfolios performed during this period of volatility and how they might plan for the next
few years in light of it all. Among the key findings:
ETF use will grow in Multi-asset strategy Liquidity and execution
the near term, say managers use ETFs with speed matter most in
institutional investors. derivatives and individual volatile markets.
securities.
65% of institutions plan to Many managers see oppor- Whether institutional
increase use of ETFs in the tunities to replace or comple- investors anticipate
next 18 months, outpacing ment derivatives and indi- repositioning their portfolios
derivatives (62%), mutual vidual securities with ETFs, to confront continued high
funds (59%), and other providing precision exposure. volatility (or a recovery) in
instruments (n=766). the near term, it’s clear that
Portfolio construction tools they want to be as nimble as
and expertise matter when
Nimble portfolio management possible.
selecting an ETF provider.
is the most pressing need.
Fixed income ETFs provided
Multi-asset strategy managers scarce liquidity during
Nearly 50% of institutions use ETFs with derivatives and pandemic-related volatility.
state the ability to quickly individual securities.
alter portfolio holdings is A vast majority (92%) of
As they invest with a keen those surveyed had difficulty
more important today vs. a eye on specific portfolio
year ago – the biggest change transacting in individual
outcomes, multi-asset
in importance among all managers turn to ETFs. bonds when volatility surged.
survey respondents (n=766). To overcome this, 54% of
Multi-asset managers–which respondents used fixed
When rebalancing, ETFs are by definition invest across income ETFs (n=766).
the most commonly used tool. asset classes in an effort to
achieve particular outcomes Transaction costs and liquidity
constraints prevented
Of institutional investors such as growth, income, or
rebalancing.
that rebalanced during risk mitigation – see ETFs as
pandemic-related volatility, especially useful for their Transaction costs (66%) and
70% used ETFs to do so, transparency (58%), trading liquidity constraints (55%)
more than any other financial flexibility (55%), liquidity were the most common
tool (n=692). (54%), and transaction cost barriers among the 74
efficiency (53%) according to institutions that hadn’t
the 362 asset managers and rebalanced during heightened
hedge funds participating in volatility (n=692).
the survey.
As you’ll read in the pages ahead, this research program finds that when faced with prolonged and
massively disruptive market volatility that erupted along with the Covid-19 pandemic, institutional
investors adapted and were able to find liquidity when they needed it most. As the crisis wore
on, investors moved to recalibrate their portfolios, making notable use of exchange-traded funds
(ETFs), which have cemented their place as a strategic and tactical instrument in the toolbox of
asset owners and managers.
3
iCRMH0121U/S-1459151-3/22
Methodology
In Q3 2020, Institutional Investor’s Custom Research Lab surveyed 766 institutional investment
decision makers in North America, Europe, the Middle East, Africa, Asia-Pacific, and Latin America,
on how they navigated market volatility in 2020. The research process also included interviews of
more than a dozen well-qualified sources at insurers, endowments, family offices, foundations,
pensions, and asset management firms. Throughout this report, the phrase “asset manager” is
used to refer to survey respondents and interview sources who work for asset management firms,
serving their clientele of asset-owning institutions.
The demographic highlights of the research cohort are below.
Institution Type (n=766) Titles (n=766)
Asset management firm 34% Chief investment officer 18%
Insurance company 20% VP or director of investment 15%
RIA firm/financial advisory Equity or fixed income 13%
10%
firm investment analyst
Public pension 9% Risk officer 13%
Endowment 6% Portfolio manager 11%
Family office 6% Product specialist 11%
Private pension 5% Director of research 10%
Hedge fund 4% Equity or fixed income trader 9%
Foundation 4%
Multiemployer / 2%
Taft-Hartley plan
Location (n=766) Assets Under Management (n=766)
North America 36% More than US$50 billion 26%
Europe, Middle East, and Africa 29% US$10 billion to US$50 billion 27%
Asia-Pacific 21% US$5 billion to US$10 billion 9%
Latin America 14% US$1 billion to US$5 billion 22%
US$500 million to US$1 billion 8%
Less than US$500 million 8%
4
iCRMH0121U/S-1459151-4/22
1
Liquidity and Speed
Prove Key in Market
Uncertainty
iCRMH0121U/S-1459151-5/22INSTITUTIONAL INVESTORS EXPECT CONTINUED MARKET VOLATILITY
As they look to the next 18 months, 68% of institutional investors expect continued heightened
volatility (n=766). During that time, they plan on increasing their use of ETFs more than any other
investment vehicle.
Of particular note during the pandemic was institutional investors’ use of fixed income ETFs
when liquidity, price discovery, usage, and transaction costs were pressure points across
multiple asset classes in the bond markets – including high yield, investment-grade corporate,
emerging markets, and, for a short time, U.S. Treasuries.
One reason institutional investors turned to fixed income ETFs during this period was
difficulty in bond sourcing and transactions. Survey respondents shared that . . .
» They had difficulty sourcing new bonds (95%) during the early period of pandemic-related
market dislocation (see Fig. 1).
» Individual bond transactions were also a pain point (92%).
» During pandemic-related volatility, their organizations increased use of fixed income ETFs as a
means to source and price bonds and to execute trades (54%) (n=762).
» When it comes to replacing individual bonds, they appreciate the liquidity of fixed income ETFs
(61%), the speed at which they can access the market (55%), and the fact that they don’t have
to engage in analysis of individual bonds (51%) (see Fig. 2).
Fig. 1: Pandemic-Related Volatility Created Difficulty in Sourcing New Bonds
To what extent has pandemic-related market volatility affected the following dimensions of
your organization’s access to the bond market? (n=766)
Great difficulty Some difficulty Little or no difficulty
Sourcing
new bonds 51% 44% 5%
Transacting in
individual bonds 42% 50% 8%
Accessing non-core
segments of the 34% 50% 16%
bond market
6
iCRMH0121U/S-1459151-6/22At the outset of pandemic-related financial stress,
ONE-ON-ONE
trading in U.S. fixed income ETFs surged to $1.3 “Our equity positions fell so
trillion in the first quarter of 2020 – half of the $2.6 much in market value, we had
trillion for all of 2019.1 In many cases, institutional to decide whether we wanted
investors found ETFs provided more liquidity, greater
transparency, and lower transaction costs than the
to rebalance back into them in
underlying bond market. the middle of a major market
meltdown, and if we could do so
at reasonable prices.
65% “We realized in the moment that
ETF markets were functioning
of institutional extremely well. They offered
investors say An additional the best way to rebalance in
29%
they will
major asset classes or in asset
increase their
use of ETFs classes where there might not be
(n=766). say they will likely as much liquidity for an active
keep their current manager.”
allocations – Senior Analyst,
to ETFs roughly Asset Manager
the same.
Fig. 2: Amid Volatility, Institutional Investors Embraced Fixed Income ETFs for
Liquidity, Speed, and Analytical Convenience
Which of the following make fixed income ETFs a good replacement for individual bonds? (n=671)
Liquidity 61%
Quick market 55%
exposure/access
Avoidance of individual 51%
security analysis
Transparency of
holdings 46%
Transaction
costs 40%
1
BlackRock, Bloomberg (as of May 31, 2020)
7
iCRMH0121U/S-1459151-7/22INSTITUTIONAL INVESTORS WANT LIQUIDITY
ONE-ON-ONE
“Toward the end of 2019, using
AND SPEED WHEN REBALANCING AND
REPOSITIONING DURING VOLATILITY ETFs to implement our credit
Nearly all – 90% – of the 766 institutional investors in strategy in investment-grade
this survey rebalanced their portfolios within six months and conservative duration3 and
of the onset of pandemic-related volatility. That in itself risk positions became a more
isn’t especially unexpected – there’s nothing like a severe
shock to reveal where a portfolio has strayed from its
viable option for us. I spent a lot
intentions, perhaps having taken on more risk or excess of time getting comfortable with
correlation2 than realized. the risks and liquidity of ETFs.
In attempting to get their asset mix back in line with
their investment guidelines, institutions expressed “The early months of the
a clear preference for ETFs, with 70% indicating they pandemic presented some case
turned to ETFs while rebalancing (see Fig. 3). studies in how they reacted
Fig. 3: Vast Majority of Institutional Investors in a less than ideal liquidity
Rebalanced Within Six Months of the environment. Coming out of that,
Pandemic Outbreak we have significant balances
Which methods have you used to rebalance your portfolio
since the start of the Covid-19 market volatility? (n=692)
to invest in that bucket of the
portfolio – cash and, in the
ETFs 70%
medium term, fixed income.
That’s where we see the most
Mutual funds 51% opportunity to expand our ETF
usage going forward.”
Derivatives 51% – Portfolio Manager,
Insurance Company
Commingled 41%
pooled funds
Individual fixed
income and equity 22%
securities
Increased cash
positions 22%
KEY TAKEAWAYS
» Most institutional portfolios were rebalanced within six months of the outbreak of the
pandemic, with ETFs as the most-used instrument.
» Institutional investors expect elevated market volatility to continue, and 65% say they
will increase their use of ETFs. A further 29% say their use of ETFs will remain at its
current level.
» Sourcing individual bonds was a major challenge during pandemic-related market
volatility. More than half (54%) of institutional investors increased their use of fixed
income ETFs as a result (n=762).
2
Correlation measures how two securities move in relation to each other. A higher correlation indicates that
securities tend to move together.
3
Duration is a measure of a bond fund’s sensitivity to interest rates. For every year of duration, a 1% change in
interest rates will lead to a 1% change in the opposite direction of a bond fund’s value.
8
iCRMH0121U/S-1459151-8/222
Nimble Portfolio
Management Evolves
With Expectations of
Prolonged Volatility
iCRMH0121U/S-1459151-9/22WITH ETFs, PORTFOLIO
ONE-ON-ONE
“We do a lot of tactical asset
CONSTRUCTION EVOLVES
For nearly as long as ETFs have existed,
allocation plays in fixed income
institutional investors have pointed to a few markets by managing overall duration
attributes that underpin the growth of their positioning. We can take on risk
use – liquidity, transparency, and efficiency. In
assets at a very granular sector level
order to reposition their portfolios for what
68% of respondents in this study expect to – private corporates, investment-
be prolonged volatility, institutional investors grade corporates, securitized assets,
are placing increased importance on those emerging-market debt – and there are
characteristics (n=766).
so many ETFs with plenty of liquidity
Speed – a combination of ease of use and that it’s very easy to get granular with
timely asset exposure – is highly desired, with asset allocation, both strategically and
49% of institutional investors saying the ability tactically.”
to quickly alter portfolio holdings is more
important today than it was one year ago (see – Senior Analyst,
Fig. 4). The expectation of volatility puts a Asset Manager
premium on liquidity, with 29% of respondents
saying it is more important now than it was a
year ago. Transaction costs are more important
“The variety of ETF vehicles that have
to 22% of institutional investors. Connect come to the market allows us to do a lot
the dots, and it becomes apparent that in more in terms of positioning portfolios.”
repositioning their portfolios for volatility, – Portfolio Manager,
institutional investors are likely to continue to
use ETFs, the core traits of which are considered Insurance Company
essential during periods of prolonged volatility.
Fig. 4: Faced with Volatility, Nimble Portfolio Management
Is Increasingly Important
Which of the following statements best describes How important are the following compared to
your expectations for repositioning your portfolio this time one year ago? (n=692)
over the next 18 months? (n=766)
More important No change Less important
1%
Unlikely to reposition in Ability to
alter portfolio 49% 34% 17%
the next 18 months
holdings quickly
31%
Likely to Liquidity 29% 42% 29%
reposition for
recovery
Transaction 22% 47% 31%
68% costs
Likely to
reposition for
continued
heightened Operational 17% 35% 48%
volatility risk
10
iCRMH0121U/S-1459151-10/22ETFs IN MULTI-ASSET STRATEGIES
ONE-ON-ONE
“As a multi-asset investor, there’s
Nearly all asset managers in the study employ not always an actively managed
multi-asset strategies, which as their name suggests
allow portfolios to be managed using a range of asset strategy to access every asset
classes, sectors, and styles. The wide variety class that I want access to.
and number of ETFs available today make them a Sometimes ETFs are the only
natural fit in multi-asset strategies, and institutional
way to get exposure to the asset
investors in the study say they sometimes deploy ETFs
as a substitute for individual securities or derivatives. class I want, and that combined
with their liquidity makes them
The top reason asset managers cite for using ETFs in an easy choice.”
their multi-asset strategies is the transparency of
the underlying holdings (58%) – likely because
– Portfolio Manager,
transparency has become increasingly important to Asset Manager
institutional investors. The asset managers in the
survey, which include hedge funds, also appreciate
the trading flexibility (55%), liquidity (54%), and cost
efficiencies (53%) that ETFs bring to their multi-asset
strategies (see Fig. 5).
Fig. 5: Why Asset Managers Use ETFs in Multi-Asset Strategies
Does your organization use ETFs as a Which of the following make ETFs useful
component of a multi-asset strategy? (n=362) components of a multi-asset strategy? (n=341)
Transparency of
5% holdings 58%
are unlikely to
use ETFs
Trading 55%
flexibility
Liquidity 54%
30% 65% Cost efficiencies 53%
are likely currently
to consider use ETFs
using ETFs Ready access to assets
that meet risk/return 42%
requirements
Ready access to assets
aligned with 32%
benchmarks
11
iCRMH0121U/S-1459151-11/22USING ETFs TO REPLACE OR COMPLEMENT DERIVATIVES IN MULTI-ASSET STRATEGIES
To meet return objectives in a low-yield, high-valuation environment, institutional investors and
their managers sometimes use derivatives and leverage to avoid concentrating risks in traditional
equities. The combination of hedge and leverage can be especially useful during heightened
volatility – which, as noted earlier, is something a majority of institutional investors expect to
continue for the next 18 months.
Trading over-the-counter (OTC) derivatives can be opaque and involves counterparty risk in a
largely unregulated venue. Avoiding that risk is a key reason that many institutional investors use
ETFs in combination with or instead of derivatives. Among respondents, 82% say they already use
or are considering using ETFs as a substitute for (or complement to) derivatives (see Fig. 6).
Fig. 6: Institutional Investors See ETFs as Viable
Alternative to Derivatives
Does your organization use ETFs as a complement to or
ONE-ON-ONE
replacement for derivatives in your portfolio? (n=746) “In some separate
accounts where we’re not
No, and
we’re unlikely 18% allowed to use derivatives
to do so in the
future and we want liquidity, we
will use ETFs.”
52% Yes
– Portfolio Manager,
No, but we’re 30% Asset Manager
likely to do so
in the future
Quick market access (63%) and liquidity (62%) are the primary reasons institutional investors use
ETFs in the role of derivatives, but more than half (55%) cite a reason unique to the derivative
scenario: avoidance of derivative analysis and counterparty negotiation required for single
transactions. Interestingly, cost efficiency is less of a concern in this scenario than in some other
use cases (see Fig. 7).
Fig. 7: Why Institutional Investors Use ETFs to Replace or Complement Derivatives
Which of the following make ETFs a good complement/replacement for derivatives? (n=612)
Quick market
exposure/access 63%
Liquidity 62%
Avoidance of derivative analysis 55%
and counterparty negotiation
Transaction 30%
costs
12
iCRMH0121U/S-1459151-12/22Derivatives and ETFs aren’t necessarily an either/or proposition for institutional
investors, and how they might use both depends on the scenario. Queried on their
preference for derivatives versus ETFs in various applications, 612 eligible survey respondents
expressed support for complementary strategies that include both ETFs and derivatives:
» 52% use both derivatives and ETFs for tactical adjustments to their portfolios.
» 48% use both during transitional periods between asset managers.
» In transition periods, 32% of institutional investors use ETFs exclusive of derivatives, while
11% use derivatives without using ETFs. For those who don’t use ETFs in place of or alongside
derivatives (n=134) , the reason is typically regulatory or organizational restrictions (87%).
» 33% of institutional investors use both when rebalancing their portfolios.
The use of ETFs alongside derivatives is an indication that institutional investors are willing to
explore new and creative uses for exchange traded funds.
KEY TAKEAWAYS
» With prolonged heightened volatility anticipated, institutional investors want their
portfolio management capabilities to be nimbler.
» ETFs create much-needed flexibility in multi-asset strategies, as they offer brisk market
access and exposure.
» Use of ETFs to replace derivatives is driven in part by a desire to avoid the analysis and
counterparty negotiation required for single securities.
13
iCRMH0121U/S-1459151-13/223
Use Cases for ETFs
iCRMH0121U/S-1459151-14/22LIQUIDITY MANAGEMENT, TRANSITION MANAGEMENT, AND TACTICAL
ADJUSTMENTS ARE TOP REASONS FOR ETF USE
Three core attributes of ETFs are their utility when an asset owner is moving investments out of
one manager and placing them with another manager, the speed with which they can be used
to tactically achieve market exposures, and the liquidity they have provided even when it was in
overall short supply in the markets. These attributes were accentuated during pandemic-related
volatility as institutional investors deployed them in essential roles. The growth story of ETFs over
the years has been fueled in large part by the consistent emergence of new ways to use them.
ETF USE CASES
Liquidity Management Transition Management Tactical Adjustments
A majority of respondents 70% of respondents use More than 60% of
(52%) use ETFs of one type or ETFs when moving from one respondents use ETFs to
another to manage liquidity manager to another (n=762). make tactical portfolio
(n=762). In a separate A majority of those using ETFs adjustments (n=762). Such
question, more than 80% of during manager transition respondents are most likely
the 394 eligible respondents see fixed income (74%) and to report using fixed income
say fixed income ETFs are equity (51%) ETFs as especially (66%) and equity (57%) ETFs
especially well suited for suitable during manager for tactical adjustments
liquidity management transitions (n=534). (n=468).
applications.
“We use ETFs to increase “If we’re going into a
“When there is a need to our exposure during the market where they may
quickly deploy or raise time it takes for us to have a home bias, ETFs
capital, the first option we identify, vet, select, and are helpful. There’s a lot
consider closely is ETFs implement a manager. of regulation outside the
because of their liquidity.” An ETF provides us with U.S., particularly in Asia,
– Portfolio Manager, the opportunity to buy around the amount you
Asset Manager something and get our can invest in underlying
beta4 exposure today.” funds. When we see we’re
– Deputy CIO, reaching those caps, we’ll
“Maybe we have a University Endowment put an ETF alongside one
manager that’s doing of our active strategies
significantly better than so we’re not violating
we think is a reasonable “Often, if you sell out of a regulations and maximum
expectation based on manager and go to cash allocations.”
how they invest. We could or some other transitional –Portfolio Manager,
trim from that manager vehicle, there’s a lot of Asset Manager
and put some of that risk. When you park it
into an ETF temporarily in an ETF, it minimizes
while we wait for some performance drag and it’s
performance reversion a very smooth transition
from the manager. We do from an asset class
that quite often.” perspective.”
– Senior Analyst, – Portfolio Manager,
Asset Manager Asset Manager
4
Beta is the return generated from a portfolio that can be attributed to overall market returns.
15
iCRMH0121U/S-1459151-15/22During critical and sometimes lengthy periods of transition management, 70% of institutional
investors relied on ETFs – with 74% of those institutional investors saying fixed income ETFs are
particularly effective for transition management (see Fig. 8).
» Tactical adjustments to their portfolios (61%) and liquidity management (52%) round out the
top three reasons institutional investors use ETFs.
» In both cases at least two-thirds of institutional investors find fixed income ETFs very useful –
66% for tactical adjustments, 83% for liquidity management.
Fig. 8: Investors Continually Find New Uses for ETFs
Which of the following types of ETF are especially suitable for . . .
Equity ETFs Fixed income ETFs Factor ETFs
Transition 51% 74% 39%
management (n=534)
Derivative complement/ 59% 66%
replacement (n=342) 40%
Liquidity 27% 22%
83%
management (n=394)
Tactical 57% 66% 34%
adjustments (n=468)
Rebalancing (n=298) 54% 62% 51%
Institutional investors also prefer fixed income ETFs to individual bonds during the portfolio
rebalancing process – 41% to 28%, according to 759 survey respondents. Given how fixed income
ETFs were used when the market was most stressed, at the start of the pandemic, it’s possible
their use during market volatility may increase over time as institutional investors become more
comfortable with the funds in challenging scenarios.
Pensions and insurance companies, two institution types with long-term requirements that
occasionally collide with short-term necessities, find ETFs have a place in their liability-driven
investing (LDI) strategies. Driven by both regulation and rational preference, pensions and insurers
rely on fixed income assets. Nearly three-quarters (73%) of the 264 insurers and pension funds
participating in the study use ETFs in their LDI strategies, and another 26% say they don’t currently
do so, but are likely to in the future.
KEY TAKEAWAYS
» Institutional investors continue to find new ways to use ETFs.
» Fixed income ETFs are frequently used for liquidity management and tactical
portfolio solutions.
» Using ETFs during manager transitions is seen as a way to potentially “reduce portfolio
performance drag,” in the words of one investment decision maker.
» Nearly 75% of insurance companies and pensions in the survey use ETFs in their LDI
strategies.
16
iCRMH0121U/S-1459151-16/224
A Preference for Large,
Liquid ETFs Linked to
the Optimal Benchmark
iCRMH0121U/S-1459151-17/22BENCHMARK INDEX PLAYS AN IMPORTANT ROLE IN ETF SELECTION
The lion’s share of AUM goes to a small number of the roughly 7,000 ETFs available globally – indeed,
the largest 20 ETFs hold 55% of the assets of the top 100 ETFs.5 Indeed, 65% of the survey’s 766
respondents plan to increase their use of ETFs, and amid expectations of prolonged volatility (see
Fig. 4), an ETF’s benchmark index is one of the most important considerations in the ETF selection
process (see Fig. 12).
The index an ETF seeks to track can be significant to institutional investors for numerous reasons
– 53% say the benchmark index is among the most important criteria when choosing among ETFs,
followed by ETF providers’ brand and market position, management fees and transaction costs,
historical performance, and several other qualities.
It is not unexpected that in a global survey three of the largest index providers are preferred as
benchmarks: MSCI, S&P, and FTSE Russell are preferred for equity investments both in allocators’
home markets and when they invest globally, and also for factor-based and ESG/sustainable
strategies (see Figs. 9-11).
Fig. 9: MSCI, S&P, and FTSE Russell Are Fig. 10: MSCI, S&P, and FTSE Russell Are
Most Common Sources of Preferred for Factor-Based and
Equity Benchmarks ESG Strategies Benchmarks
Which index providers do you rely on for Which index providers do you rely on for benchmarking
benchmarking your equity investments? (n=766) your factor-based and ESG strategies? (n=766)
Domestic equities Factor-based strategies
International equities Sustainable/ESG Strategies
29% 30%
28% 28%
26% 26% 26%
25% 23%
23% 22% 22%
14% 13%
12% 13%
11% 10%
8%
7%
MSCI S&P FTSE Morningstar Qontigo/ MSCI S&P FTSE NYSE ICE
Russell Stoxx Russell Factset
Fig. 11: S&P, FTSE Russell, and Bloomberg Are Dominant FI Index Providers
Which index provider do you rely on for benchmarking your fixed income investments? (n=766)
34% IG fixed income
29% HY fixed income
26% 25% EM debt
23% 24% 23% 22%
18% 17% 17%
15%
5% 4% 6%
3% 3%
2%
S&P FTSE Bloomberg JPMorgan ICE iBoxx IHS
Russell Markit
5
According to January 13, 2021 data in the ETF Database, which publishes data on the use of ETFs.
https://etfdb.com/compare/market-cap/
18
iCRMH0121U/S-1459151-18/22On the fixed income side, S&P and FTSE Russell
ONE-ON-ONE
rank first and second, respectively, as the preferred “Post-March and April [2020],
benchmarks for investment- grade corporate, high yield, we did put money into ETFs
and emerging market debt, with Bloomberg a third because we wanted to focus
preference.
on a specific index or ETF.
Perhaps recognizing that institutional investors have We believed that we would
a need for advanced ETF analytics, asset managers see a beta rally as the market
and broker-dealers have developed tools that allow in general came back up, so we
for investment vehicle comparison across a variety of
metrics. were able to participate. We
put money into a few active,
When it comes to evaluating ETFs, 60% or more of high-conviction managers that
institutional investors and asset managers use each of
we thought would bounce back,
three sources of information asked about in the survey:
Bloomberg or a similar data platform (64%); tools but a lot of the money that we
provided by asset managers (62%); and broker-dealer invested into equities went
analysis tools (60%). to ETFs.”
– CIO,
A CLEAR GLOBAL PREFERENCE FOR AUM,
LIQUIDITY, AND TRADING VOLUME Foundation
As noted above, the benchmark to which an ETF is linked
is a critical consideration in institutional investors’ decisions when choosing among ETFs – only AUM,
liquidity, and trading volume are considered more important, although considerably so, by 68% of
institutional investors (see Fig. 12).
Fig. 12. Institutional Investors Seek Large, Highly Liquid ETFs
Linked to the Right Benchmark
When choosing among ETFs, which of the following contribute most
to your decision? (n=762)
AUM, liquidity, and
trading volume 68%
Benchmark index used 53%
ETF provider's brand and 48%
market position
Historical performance 46%
Value-added services from 45%
ETF provider
Management fee 34%
Transaction cost 29%
19
iCRMH0121U/S-1459151-19/22Of note in the above data is the value-add from ETF
ONE-ON-ONE
providers. Although low on the list of considerations “We use a number of tools – but
that swing decisions toward one ETF or another, it’s we also rely on the provider
a data point that indicates there are big expectations of ETFs to a great extent. They
around what services institutional investors find
valuable – and likely expect – from an ETF provider.
have a lot of analytics in terms
of trading activity, flows, and
Viewed in the context that 62% of respondents use underlying liquidity of the asset
tools provided by asset managers to evaluate ETFs, class. So we take a holistic view
the importance of value-added services is magnified.
Portfolio construction expertise is considered highly and we try to incorporate as
desirable by nearly 7 in 10 institutional investors, and many sources as possible.”
an effective client service team, market insights, and – Senior Analyst,
portfolio modeling and trading tools are also on the
Asset Manager
wish list for at least half of institutional investors (see
Fig. 13).
Fig. 13. Institutional investors value expertise and service from ETF providers
When choosing among ETFs, which of the following value-added services from
ETF providers do you or would you find most helpful? (n=762)
Portfolio construction expertise
(e.g., risk(e.g.,
factorrisk factor portfolio
analysis, analysis, aportfolio
nalytics, 68%
returns-based analysis
analytics, returns-based )
analysis)
Client service
Client service teams
teams 60%
60%
Market
Market educationand
education andinsights
insights 60%
60%
Portfolio consulting
Portfolio consultingsolutions
solutions
(e.g., fund
(e.g., fundcomparison,
comparison, index and
index and 56%
56%
E TF
ETF deepdives,products
deep dives, product expertise)
expertise)
Portfolio modeling
Portfolio and
modeling trading
and trading tools
tools 51%
51%
Institutional investors in the survey set a high bar of what they expect from an ETF and its provider,
including:
» AUM, liquidity, and trading volume
» A suitable benchmark
» Value-added services, including a dedicated client service team
» Market insights
» Expertise around all aspects of portfolio construction and modeling
» Effective trading tools
20
iCRMH0121U/S-1459151-20/22Based on the expectations institutional investors have regarding products and services from ETF
providers, BlackRock/iShares is the firm that most often hits the mark. With nearly a quarter of
survey respondents (24%) selecting BlackRock/ iShares, the firm holds a top position as a preferred
ETF provider globally (see fig. 14). State Street/SPDR ranks second globally, with 12%, followed by
Invesco and Vanguard at 9% each, and Wisdom Tree and Proshares, at 5% each.
Fig. 14. Top Ranked ETF Providers
Which firm is your ETF provider of choice? (n=762)
Provider
BlackRock/iShares 24%
State Street/SPDR 12%
Invesco 9%
Vanguard 9%
Wisdom Tree 5%
Proshares 5%
Note: An additional 19 firms – none of which earned a share of 5% or more – received votes from survey
respondents. Ranking is not based primarily on ETF provider, asset manager, or investment advisor client
evaluations. Ranking is based on 762 responses to the question: “Which firm is your ETF provider of
choice?” in this global survey of institutional investors conducted by Institutional Investor. Ranking is not
representative of any one client’s experience. No asset manager, advisor, asset owner, or ETF provider paid
a fee or was paid a fee to participate in the survey. The ranking of any ETF provider is not indicative of the
future performance of any ETF, ETF provider, asset manager, or investment advisor.
KEY TAKEAWAYS
» An ETF's benchmark index is a primary consideration in selecting an ETF, second only
to AUM, liquidity, and trading volume (which were presented as a single choice to
respondents).
» MSCI, S&P, and FTSE Russell are the most commonly used benchmarks for equities, while
S&P, FTSE Russell, and Bloomberg lead in fixed income.
» Institutional investors have expectations of value-added services and tools from ETF
issuers. In this context, portfolio construction is the most highly prized service.
» Market insights, portfolio modeling, and trading tools are also high on the list of
institutional investor expectations of ETF providers.
» According to institutional investors in the survey, BlackRock/iShares is a leading source of
ETFs and related services and tools.
21
iCRMH0121U/S-1459151-21/22Reprinted with permission of Institutional Investor, January, 2021. The opinions expressed in this reprint
are intended to provide insight or education and are not intended as individual investment advice. We do
not represent that this information is accurate and complete, and it should not be relied upon as such.
Carefully consider the Funds’ investment objectives, risk factors, and charges and expenses before
investing. This and other information can be found in the Funds’ prospectuses or, if available, the
summary prospectuses which may be obtained by visiting www.iShares.com or www.blackrock.
com. Read the prospectus carefully before investing.
Investing involves risk, including possible loss of principal.
Fixed income risks include interest-rate and credit risk. Typically, when interest rates rise, there is a
corresponding decline in bond values. Credit risk refers to the possibility that the bond issuer will not be able
to make principal and interest payments. Non-investment-grade debt securities (high-yield/junk bonds) may
be subject to greater market fluctuations, risk of default or loss of income and principal than higher-rated
securities.
International investing involves risks, including risks related to foreign currency, limited liquidity, less
government regulation and the possibility of substantial volatility due to adverse political, economic or
other developments. These risks often are heightened for investments in emerging/developing markets
and in concentrations of single countries.
There can be no assurance that performance will be enhanced or risk will be reduced for funds that seek
to provide exposure to certain quantitative investment characteristics ("factors"). Exposure to such
investment factors may detract from performance in some market environments, perhaps for extended
periods. In such circumstances, a fund may seek to maintain exposure to the targeted investment factors
and not adjust to target different factors, which could result in losses.
A fund's use of derivatives may reduce a fund's returns and/or increase volatility and subject the fund
to counterparty risk, which is the risk that the other party in the transaction will not fulfill its contractual
obligation. A fund could suffer losses related to its derivative positions because of a possible lack of
liquidity in the secondary market and as a result of unanticipated market movements, which losses are
potentially unlimited. There can be no assurance that any fund's hedging transactions will be effective.
There can be no assurance that an active trading market for shares of an ETF will develop or be maintained.
Transactions in shares of ETFs may result in brokerage commissions and will generate tax consequences.
All regulated investment companies are obliged to distribute portfolio gains to shareholders.
Transactions in shares of ETFs will result in brokerage commissions and will generate tax consequences. All
regulated investment companies are obliged to distribute portfolio gains to shareholders. Diversification
and asset allocation may not protect against market risk or loss of principal.
Shares of iShares ETFs may be bought and sold throughout the day on the exchange through any
brokerage account. Shares are not individually redeemable from the ETF, however, shares may be
redeemed directly from an ETF by Authorized Participants, in very large creation/redemption units. There
can be no assurance that an active trading market for shares of an ETF will develop or be maintained.
The strategies discussed are strictly for illustrative and educational purposes and are not a
recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy.
There is no guarantee that any strategies discussed will be effective.
The iShares Funds are distributed by BlackRock Investments, LLC (together with its affiliates, “BlackRock”).
This study was sponsored by BlackRock. BlackRock is not affiliated with Institutional Investor or any of their
affiliates.
iSHARES and BLACKROCK are registered trademarks of BlackRock. All other marks are the property of
their respective owners.
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InstitutionalInvestor.com
Copyright © Institutional Investor LLC 2021 All rights reserved.
All text and content of this research report are the exclusive property of Institutional Investor. The
research and commentary in this document are intended to highlight results, trends, and patterns among
respondents in this study. In no event should the content of this report be construed to constitute an
investment recommendation or managerial advice.
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