Institutions Using ETFs More Strategically

Coverage of the 2015 ETF Summit

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chess piecesWhat’s the outlook for exchange-traded funds (ETFs) in the institutional space? Favourable.

ETF use has come up in my practice, said Kevin Rusli, a partner with Blake, Cassels & Graydon, speaking at the ETF Summit yesterday in Toronto.

Since 2006, when TD introduced the first ETF, the funds have really taken off, he said. “And since the financial crisis, people have looked at ETFs as a way of investing.”

Michael Greenberg, vice-president and portfolio manager with Franklin Templeton Solutions agreed, saying its ETF use began six or seven years ago. “The original impetus was for liquidity,” he said. “There was also [the ability to] access more nuanced markets where we didn’t have an active manager—for example, physical gold.” Greenberg said it’s also using ETFs to get in and out of niche opportunities in the markets, pointing to Australian bonds as an example.

But within the institutional space, there has been a shift from a more tactical use of ETFs to a strategic one.

Robert C. Turnbull, vice-president, head of asset owner ETF sales, with State Street Global Advisors, said there’s more strategic use in terms of the portfolio.

But the strategic aspect really depends on the plans, he said. “Most pension plans are looking for risk-adjusted returns and downside protection.” The strategic plays a role in resource-constrained pension plans—real estate, infrastructure, private equity—and plans are going to spend their resources budgets on these areas, he continued, but then go passive on other asset classes such as fixed income.

And while passive versus active has been one of the debates in ETFs, Rusli said the relationship between active and passive is blurring. “It’s not so polarized.”

Turnball agreed. He said the industry is embracing beta tools and passive tools in an active manner, and the active managers are participating in the growth of the ETF structure.

“I think we’re finally seeing [the active ETF] market take hold,” Turnbull said. “The use of passive instruments by an active manner is converging and will have an impact on the industry in the next 10 years.”

Greg Walker, managing director, head of iShares business development, with BlackRock Asset Management Canada Ltd., agreed that strategies blending active and passive are successful. “But true active is still out there,” he said.

Whatever form of ETF plan sponsors take, one thing is certain: education.

With more complex ETFs out there, the buyer needs to be informed, said Greenberg.

Rusli agreed. “Buyer be informed is all the regulators can do,” he said. “People have to do their own homework. ETF usage in the Canadian market should be a growing area. Once [investors] start to understand, it will get better.”

Education is key, Turnball said, adding there’s still the perception that ETFs are expensive and more for the retail space. “It has to be a delicate balance how these tools work for those that manage pension plans—and not replacing the skill the plans bring to the table.”

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