Five things we learned at the ETF Summit

How are Canadian pension funds using ETFs?

March 12, 2014

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592163_chalkExchange-traded fund (ETF) use among institutional investors keeps going up, up, up, according to most research on the space. ETF research firm ETFGI, for example, found that half of U.S.-listed ETFs were held by institutions at the end of 2012, and, over the last year, many have told us they’re planning on boosting allocations to everything from fixed income ETFs to smart beta products designed to give investors a smoother ride.

But it’s not always easy to get a handle on exactly what’s going on with ETFs among pension funds and other large investors who tend to play their hands close to their chest when it comes to talking about specific tactics and strategies. At Canadian Investment Review’ second annual ETF Summit in Toronto, we got the chance to take a look under the hood and see exactly how some Canadian plan sponsors are using ETFs and what some of the top trends in the space are going to be over the next few years. We’ll be running full conference coverage in an upcoming issue of Benefits Canada (stay tuned). In the meantime, here are the top five things we learned from being in a room with some of the best and brightest ETF practitioners in Canada.

  1. Plan sponsors can use ETFs for hard-to-reach assets – Presenters discussed how ETFs can help plan sponsors access hot areas such as emerging markets small cap and senior loans. However, they might not be ideal for real estate or infrastructure investing because they’re still way too linked to equity market performance—and that’s not going to change soon, according to some speakers.
  2. Institutions are holding ETFs longer – The number of institutional investors holding ETFs for longer than two years has jumped since 2011, from 21% to 36% in 2013.
  3. Pension investors want to use ETFs more strategically – Explosive growth in the number and spectrum of products available makes the case for strategic ETF use stronger than ever in the pension space. Plan sponsors can now make specific country allocations, invest in commodities or buy low-volatility funds.
  4. Perceived disconnect with the core – ETFs are helpful for plan sponsors, but it’s still tough to find a way to use them strategically, according to some. Many products aren’t designed for long-term holdings, particularly in the area of commodities and when it comes to a few of the volatility-based products on the market. And implementation costs can add up depending on what kind of strategy you’re using.
  5. Education – A clear learning curve exists in the pension community, where many plan sponsors are far more comfortable with active managers and still find ETFs daunting when it comes to due diligence and trading requirements. Plan sponsors need a stronger understanding of how they work and where they fit in a pension portfolio. And that’s where the education process starts, particularly for smaller plans.
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