Growth ahead for ETFs

Institutional investment in exchange-traded funds is projected to grow to $300 billion annually by 2020. This is a conclusion presented by Global Trends in Institutional ETF Adoption: Drivers for Growth Through 2020, a Greenwich Associates study for which the firm interviewed 408 institutional investors in North America, Europe and Asia, including corporate pensions, public pensions, foundations, endowments, asset managers, insurance companies, investment consultants, and registered investment advisers (RIAs).

“The results of the study suggest future growth of ETFs in the institutional channel will be driven by the continued discovery of new and more sophisticated applications for the funds across investment portfolios,” says Andrew McCollum, Greenwich Associates Managing Director and author of the report.

2015 was a record-breaking year for ETFs as a category, which attracted more than $350 billion in new assets globally, adds Greenwich Associates. Institutional investors are growing contributors to ETF demand, which has historically been driven by retail investors. An analysis of the research yielded five key drivers of institutional ETF adoption that Greenwich Associates projects together will generate approximately $300 billion in annual investments by 2020:

The broadening use of ETFs across applications and asset classes will drive $132 billion in new annual demand in five years’ time.

The migration toward using ETFs to obtain core exposures and achieve strategic goals will produce $42 billion in annual flows.

Liquidity needs will fuel demand for ETFs in fixed income, driving $68 billion in new annual flows.

Institutions using ETFs to replace derivatives positions will produce $28 billion in flows annually.

Innovative exposures like smart-beta ETFs will attract $25 billion in annual flows.