Liquidity Needs Drive Canadian Institutions to Bond ETFs

tap water dropCanadian institutional investors are expanding use of exchange-traded funds in their portfolios, using them for risk, liquidity and volatility management according to a new report from Greenwich Associates and sponsored by BlackRock.

The research finds that 58% of institutions use ETFs strategically — 63% of institutions say their ETFs have holding periods of one year or longer.

Institutional investors are using ETFs for international diversification (78%), tactical adjustments (68%), and core allocation (44%) among other top uses.

Nearly half – 47% — say they’re using ETFs to manage liquidity. And 85% of institutions cite ease-of-use as their top reason for turning to ETFs, with 80% saying that speed of execution is the most compelling reason. More than three quarters of users look to ETFs for liquidity and single-trade diversification, particularly for bonds.

In terms of asset categories, 90% are invested in equities, with two-thirds of users investing in U.S. and international equity ETFs and 57% investing in Canadian equities via ETFs.

Tilt to fixed income ETFs

Nearly 60% of Canadian ETF investors are in bond ETFs, including three quarters of asset managers and insurance companies.

Canadian institutions using ETFs have an average of 26% of total fixed income assets in bond ETFs, far ahead of other markets, including Europe where that number is closer to 8%. Insurance companies in particular are heavy users of bond ETFs – allocations to fixed income ETFs at some insurers top 35%.

The push for bond ETFs is driven primarily by concerns over liquidity – 81% list this as the top benefit of investing in fixed income ETFs.

Thirty-one percent of Canadian institutions also invest in smart beta ETFs – and 56% plan to increase that allocation in future. Read the full report here.