ETFs now more important as short-term instrument

Exchange-traded funds (ETFs) have risen in importance for defined benefit (DB) pension plans and other investors in the aftermath of 2008, when the collapse of Lehman Brothers triggered the financial crisis.

A study of investor allocations since 2009 shows that ETFs have gained a “notable prominence” with a 26% increase in the amount of DB investors who favour ETFs for short-term investment opportunties.

The finding is from a report by Create-Research, a consultancy, and sponsored by Principal Global Investors. The report covers global investors, but is biased towards European investors.

Nearly 50% of DB plans used ETFS to gain exposure to emerging market bonds and equities.

For medium-term asset allocation, traditional index funds were favoured – not just over ETFs, but in asset allocation terms generally.

The report also covers defined contribution (DC) investors, retail and high-net-worth investors. ETFs did similarly well.

DC investors preferred traditional index funds for medium-term allocation, with a 22% increase in those that demanded them since 2009. No score was given for ETFs.

But for opportunistic investing, ETFs registered a 25% increase.

ETFs led in the retail-investor category as the instrument with the biggest increase in demand from investors over medium-term asset allocation (28%) and for opportunistic investing (33%).

In the high-net-worth category ETFs came second to traditional index funds – 19% and 24%, respectively – for medium-term allocation, but led the field with 11% for short-term opportunities.

The CreateResearch report is called Asset Allocation, Leaders Laggards and Newcomers: 2009-2013.

Professor Amin Rajan, chief executive of Create-Research, says: “The shift in investor focus from wants to needs is marked, as is the accompanying change in the underlying asset mix. This process has created its own leaders and laggards. It has also catapulted new asset classes to the fore, especially ETFs. The longer the debt crisis lasts, the more ingrained will these changes become.”