Institutional adoption of ETFs continues, which should make all investors happy. In a new report from S&P Dow Jones Indices, the amount of money U.S. and Canadian “asset owners” held in ETFs increased 22% to $56 billion in 2023. The asset owner category consists of pensions, endowments, foundations, and sovereign wealth funds.
According to S&P Dow Jones Indices, this group of institutional investors increased ETF usage fourfold in the past decade. The number of asset owners using ETFs has nearly doubled. At VettaFi, we believe there is room for significant growth.
Approximately 80% of these institutional ETFs assets were held in equity ETFs, with large-cap products dominating. The SPDR S&P 500 ETF Trust (SPY ) and the iShares Core S&P 500 ETF (IVV ) were the most widely held ETFs, according to S&P Global Market Intelligence data. This should be no surprise, since these are the two largest ETFs industrywide and they trade with appealingly tight spreads.
Focused on Financials
Meanwhile, approximately 15% of the equity ETFs held by asset owners were in sector ETFs. Raghu Ramachandran, senior director at S&P Dow Jones Indices, noted that the allocation between sectors has varied considerably over time. At year-end 2023, assets owners showed a relative overweight to financials and an underweight to information technology versus the overall ETF industry.
For example, the Healthcare of Ontario Pension Plan and the Canada Pension Plan Investment Board owned the Financial Select Sector SPDR (XLF ). This fund provides exposure to large-cap financial stocks in the S&P 500.
Multifactor ETFs Gain Traction
While market-cap weighting was dominant, according to the report, 7% of the equity assets were invested in smart beta ETFs. Ramachandran noted that asset owners had minimal investments in smart beta strategies until 2021, when they began using multifactor ETFs.
At the end of 2023, the Municipal Employees Retirement System of Michigan was a large owner of smart beta ETFs. The pension fund held approximately $900 million of the Invesco S&P 500 QVM Multifactor ETF QVLM and nearly $300 million of the Invesco S&P Midcap 400 QVM Multifactor ETF (QVMM ). These ETFs own stocks that have strong quality, value, and momentum attributes. The indexes behind these ETFs are rebalanced quarterly.
Treasuries Looked Appealing
Although a smaller allocation, asset owners have increased their fixed income ETF usage fourfold in the past five years. Corporate bond ETFs comprised 45% of the fixed income holdings as of the end of 2023. However, Treasury and broad market ETFs saw significant inflows recently per S&P Dow Jones Indices.
The SPDR Portfolio Short-Term Treasury ETF (SPTS ) and the Vanguard Short-Term Treasury ETF (VGSH ) are two examples of widely held Treasury ETFs by asset owners.
Though the asset base remains extremely small relative to the $8 trillion ETF market, we view the growing usage by asset owners as highly encouraging. The ETF market runs efficiently when there are a wide range of buyers and sellers. As asset owners gain more comfort, we expect ETF liquidity to further improve.
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