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Fast food/long lunches, sidewalks/pavements, fall/autumn—either side of the Atlantic has its own way of viewing things, and it seems the use of exchange-traded funds (ETFs) is about to join the list.
In the US, the use of these specifically designed instruments is on the rise, while Europeans give a nonchalant shrug at their very mention.
Almost half of all US endowment funds use ETFs, research from Greenwich Associates found in May. The nation’s pension funds are not far behind, with a quarter already invested in the vehicles. The latest convert was the Arizona State Retirement System, which became the first pension plan to seed three new ETFs in July, providing $100 million for each.
The $31 billion pension partnered with BlackRock’s iShares to create three products that track indices from MSCI’s risk premia family of factor-based indices, and each has a total expense ratio of 0.15%. Arizona’s assistant CIO Dave Underwood told IndexUniverse.com the ETFs act as an overlay strategy on the fund’s total equity portfolio.
The move reflects a growing trend in the US. According to Greenwich Associates’ May study, “Institutional Investors’ Relationships with ETFs Deepen,” 18% of all US institutions used them, up from 14% in 2012. Half of that 18% planned to increase their allocations to ETFs in the next year.
Almost everyone uses them for equity exposure, although a growing number of investors want ETFs for domestic fixed income. Some 70% of users employ ETFs for tactical portfolio adjustments, up sharply from 48% in 2012.
Across the Atlantic, attitudes towards ETFs are somewhat cooler. Few Nordic countries are adopting them, although there is some notable popularity in Finland, according to research from NRPN.com.
In August, aiCIO asked more than 20 European readers if they used ETFs or were planning on increasing their exposure in the next 12 months. Almost all of the respondents told us they weren’t using them—at all.
“ATP does not use ETFs in the portfolio,” Anders Hjælmsø Svennesen, co-CIO at the Danish fund, says. “ATP wants its own customized exposure to all asset classes. We use different strategies (including risk premia strategies) that cannot be replicated through standard products. And, with the size of ATP’s portfolio, we can get the same exposure more efficiently.”
The situation’s no different in Switzerland: Roger Inglin, investment manager for the Credit Suisse Group pension scheme, says he doesn’t use ETFs and has no desire to in the future.
In the UK, Larissa Benbow, head of investments at the HBOS pension, says she doesn’t use the funds and has no intention of ever using them. Universities Superannuation Scheme’s CIO Roger Gray says ETFs have been used only “to a limited extent,” and Centrica’s CIO Chetan Ghosh does not directly employ them at the moment. The BBC’s Director of pensions investments James Duberly says he doesn’t use them as the costs were “generally higher than traditional passive/systematic management and the liquidity is generally less good than the futures market.”
aiCIO did find one European user: In Ireland, the National Pension Reserve Fund retains an investment from 2006 to provide long-term beta exposure to US small-cap equities. A spokesman for the fund says it would be open to using non-equity ETFs and, depending on the costs and tracking error, could use them to implement short-term tactical positions, in managing transitions/portfolio adjustments, or to gain long-term exposures in futures.
Why the discrepancy between European and US investors? Isabelle Bourcier, head of business development at European ETF provider Ossiam, thinks she knows. “The US institutional market is very competitive and more open to ETFs, which have had to compete not only with tracker funds but also with futures and swaps for the attention of these investors,” she says. “For pure beta exposure, European institutional investors have preferred to go through competitive bidding processes to select managers of tracker funds and meet specific criteria. They have not had the incentives—including price reasons—to move towards ETFs. ETFs also suffered bad press in the UK for the last two years, which partially explains why CIOs as well as consultants there are shy on the topic.”
Lloyd Raynor, director in the pension solutions group at Russell Investments, agrees the price will have to fall for UK CIOs to become interested. “Secondly, while the daily liquidity of ETFs allows for the quick entry and exit into particular beta segments, only a limited number of institutional investors wish to employ shorter-term granular beta beliefs,” he continues. “This is related to the governance necessary to time granular beta exposures effectively.”
In a cost-conscious world, dramatic European take-up of ETFs looks unlikely any time soon. But if providers can bring fund prices down so they’re comparable with index tracker funds, swaps, and futures, CIOs’ attitudes could align with those of their US peers—but probably not regarding the length of their lunch breaks.