Why aren’t more plan sponsors using ETFs?

1209888_no_entry_signBack when I started blogging about exchange-traded funds (ETFs), institutional use was pretty sparse and limited to handful of products. However, that picture has changed markedly over the last few years—institutional use has grown exponentially and the spectrum of products they’re turning to is also shifting, with greater attention on fixed income ETFs for liquid access.

That upward trend certainly extends to the pension space—but they still haven’t wholeheartedly embraced ETFs, particularly on the DC side.

The question is, why?

A survey by Pensions & Investments sheds some light on barriers to use and although the data isn’t Canadian (we do things a bit differently here) it’s still interesting in light of our own patterns of ETF use (we’re using them but we’re hardly flooding into the market in droves).

The U.S.-based pension publication looked at plan sponsors as well as foundations and endowments and found that 34% are currently using ETFs and a further quarter plan to increase their usage.

An impressive number to be sure—but it still leaves a large percentage on the sidelines.

Reasons cited for steering clear of ETFs include:

  • 46% of respondents say that don’t need intraday liquidity;
  • 34% are invested mainly in active strategies;
  • 19% cite high all-in costs;
  • 17% cited complexity; and
  • 5% blamed low trading volume.

Barriers on the DC side include:

  • 28% say their record keepers don’t accommodate ETFs;
  • 27% offer mostly active strategies;
  • 22% said complexity is a barrier; and
  • 21% cited high cost.

While the survey includes a lot of interesting data about U.S. plans and their views on ETFs, the most telling findings are around the barriers to use. Collectively, barriers such as complexity and the preponderance of active strategies suggest that much more education needs to be done on the role ETFs can play in a portfolio. Providers have been talking about the benefits of ETF usage beyond rebalancing and intraday liquidity— while the message might be getting to some plans, there are clearly many more that need to be convinced before ETF usage really hits its stride in the pension space.

You can read the survey results here. Meantime, feel free to share your thoughts in the comments below.