European institutional investors increased their allocations to exchange-traded funds (ETFs) dramatically in 2018, according to research by Greenwich Associates.

The US-based data provider said in a report published this week that institutional allocations to ETFs grew by 50% in 2018 compared with a year earlier.

Inflows into the vehicles totalled $315.8bn (€277.6bn), the second-highest figure recorded by Greenwich’s annual survey after the $467.1bn recorded in 2017.

“As institutions repositioned their portfolios to address heightened volatility and risk, they made wide use of ETFs to implement specific modifications,” the company said. “Institutions are utilising ETFs as both tactical tools and as a strategic, longer-term staple in the portfolio.”

Other influences on the growth of ETFs included investors’ ongoing search for “low-cost beta”, Greenwich said, as well as a wave of ETF launches focused on environmental, social and corporate governance (ESG) themes.

Greenwich’s research revealed that Spanish asset owners had the highest allocation on average to ETFs at 26% of overall assets, based on a sample size of six. Italian investors allocated an average 20% to ETFs, while Swiss investors dedicated 18%.

Of the investors polled by Greenwich, 36 said they had used ETFs as a direct replacement for other investment vehicles. Nearly three quarters (72%) of these said they had replaced active mutual funds, while ETFs were also a popular replacement for index mutual funds (39%) and directly held bonds (33%) and equities (31%).

“Due in large part to [the] trends of portfolio repositioning and growing demand for index strategies, ETF allocations surged in both equity and fixed income last year,” Greenwich said.

A third of investors – 26 firms – currently using ETFs planned to increase their allocations, with 11 planning to up their holdings by more than 10%. One in five fixed income ETF users said they would increase their allocations in 2019.

BlackRock’s iShares ETF unit was the most popular among European investors, with 94% of the 89 respondents using the firm’s products. DWS’ X-trackers arm was second favourite with 56%, while Lyxor came in third.

Further reading


ETFs Guide

IPE’s 2018 ETFs Guide

Can investors rely on established and emerging big players to keep costs down and to continue innovation? IPE looks in depth at the issues and opportunities shaping the fast-growing ETF sector, from regulation and implementation to smart beta products, ESG indices, and even cryptocurrencies.