ETF providers wise up to what plans need

whisperEmerging markets equities have been the big story for Canadian pension funds for the past few years. But as pension funds battle low yields and low interest rates in developed markets, they’re also turning to emerging markets debt to fill some notable gaps in the traditional fixed income opportunity set. Now there’s an exchange-traded fund (ETF) that could help ease inflation concerns for institutional asset managers, including plan sponsors, that are worried rising prices could take a bite out of the performance of emerging markets debt. It’s not ready for Canada yet, but State Street Global Advisors (SSgA) last week launched the world’s first ETF with exposure to inflation-linked debt in emerging markets. The SPDR Barclays EM Inflation-Linked Local Bond Ucits ETF is listed on the Deutsche Börse, and a listing on the London Stock Exchange is expected shortly.

While it’s an ocean away from Canadian plan sponsors, the new product shows how the ETF space is evolving to address concerns that are specific to institutional investors and, specifically, plan sponsors that are looking for easier ways to access an asset class that can be tough to get at. Indeed, SSgA interviewed pension and other asset managers across Europe in March and found that three-quarters expect global inflation to rise over the next 20 years and that 70% think emerging markets are more susceptible to inflationary pressures than their developed market counterparts.

While that might not be a big surprise for plan sponsors in Canada that are also concerned about the potential for inflation (it’s a huge concern for any pension plan), the challenge is figuring out what to do about it. European managers told SSgA that access is a big challenge, with only 19% noting that it was easy to access inflation-linked bonds, even though nearly half (47%) plan to boost their emerging markets debt holdings in the next few years.

Designing an ETF to help asset managers gain exposure and manage inflation risk in their emerging markets debt portfolios is a great concept. And it shows how the evolving ETF market is creating products designed to help institutional investors, including pension funds, manage risk. The other week, for example, I wrote about this suite of products. And then, last week, BlackRock also launched this set of fixed income ETFs with longer maturity dates that are designed to appeal to institutional investors such as bank treasurers.

As the industry gets better at designing products that meet the needs of institutional investors, it is likely to pique the interest of Canadian plan sponsors looking for easier ways to access what they need. And since the very first ETFs launched on the Toronto Stock Exchange were originally designed for institutional investors, it’s nice to see them getting back to their roots.

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