Institutional engagement with Exchange-Traded Funds (ETFs) remains limited, a significant impediment to broader adoption in this sector.
Despite institutions managing an immense $31 trillion in U.S. professionally managed assets, their investment in ETFs is relatively modest at $1.3 trillion, a mere 4.2% of their total assets, as highlighted in a recent report by Cerulli Associates, released on December 7.
The report, "U.S. Exchange-Traded Fund Markets 2023: Product Development Opportunities for a Maturing Structure," reveals a tepid institutional approach to ETFs. Only a quarter of institutional investors surveyed are utilizing equity ETFs, and a slightly lower percentage, 24%, are engaging with fixed-income ETFs.
ETF issuers identify a preference for alternative investment vehicles as the primary barrier to ETF uptake among institutions. This challenge is recognized by 37% of ETF issuers. Additionally, the lack of ETF education among institutional clients and hesitance from consultants or outsourced chief investment officers to advocate for or utilize ETFs are also significant hurdles, each cited by 26% of respondents.
Daniil Shapiro, Director of Product Development at Cerulli, emphasizes the importance of education in enhancing institutional ETF adoption. In an interview, he advised ETF issuers to intensify their educational efforts towards institutional clients, delineating the practical applications of ETFs.
The report further indicates a disparity in the source of ETF assets, with over 80% originating from retail rather than institutional clients. Shapiro, detailing the methodology of the study, notes that the ETF issuer survey encompassed about 30 respondents and was conducted in the latter half of the year. The asset owner survey, completed in the first half of 2022, included approximately 200 participants, encompassing executives from diverse institutional backgrounds such as public and corporate defined benefit plans, endowments, foundations, insurance companies, and other channels.
