Fixed-income ETFs have some room to grow

Seventy percent of respondents to this year's Trackinsight global exchange-traded fund survey reported investing in fixed-income ETFs, but more than half of those investors said such ETFs represented less than 20% of their portfolios.

"This should leave the industry room to develop those products further, but some externalities such as the rising rates environment make the task difficult for fixed-income ETF providers," according to Trackinsight's Global ETF Survey 2022.

P&I partnered with Trackinsight SAS to launch the P&I ETF Exchange in 2021, a digital platform designed to provide asset owners and institutional investors with data analysis tools to make investment decisions.

Fixed-income ETFs were among a variety of ETF industry components addressed in the third edition of Trackinsight's survey, which contained responses from more than 340 professional investors spanning 20 countries and representing ETF exposure totaling $415 billion.

Asset managers, family offices and financial advisers remained the most-represented groups among respondents, according to the survey, conducted in January. Pension funds accounted for 6% of 2022 survey respondents, while endowments and foundations accounted for 4%, followed by defined contribution plans at 3% and insurance companies at 1%, according to Trackinsight.

"Our respondent base is very familiar with ETF investing as more than half of them have over 60% invested in ETFs," the survey said. In 2022, slightly more than a third of investors surveyed said they are looking to increase the share of ETFs overall in their portfolios. That was down sharply from 2020, when nearly 60% of respondents were expecting to increase exposure. The survey said it was possible to consider that the "seismic shift" toward ETF adoption in professional investors' portfolios has already occurred.

"In 2021 and 2022, more than half of our respondents aren't considering increasing the share of ETFs in their portfolios," the survey said. "Moreover, the proportion of investors who are thinking about decreasing their allocation to ETFs has been rising year after year, to reach a little under 10% in our most recent survey."

Fixed-income ETFs "registered the most intentions of reducing exposure" at 13% of respondents, the survey said.

"This might reflect the negative impact of the current raging inflation environment on fixed-income assets," the survey said. "As rates rise, traditional passive fixed-income ETFs become less attractive for investors, but the rise of actively managed fixed-income ETFs might help curb this trend."

The Federal Reserve raised its benchmark interest rate 75 basis points on June 15, its largest rate hike since 1994.

The current environment aside, another factor that might explain why only 5% of survey respondents plan to increase their allocation to fixed-income ETFs by more than 20% could be the difficulty in comparing products and strategies, something that was reported by nearly half of survey respondents. Still, most investors surveyed appeared to agree that ETFs might offer a solution when it comes to fixed-income market illiquidity. In the 2022 survey, 63% of respondents said they would use ETFs to invest in less liquid fixed-income securities, up from 53% in 2021.

Actively managed ETFs were expected to be the next ETF industry growth engine, retaining the benefits of a "cheap, flexible and liquid wrapper" while offering the potential for alpha generation, a proposition that should have appeal "in irrationally rising markets that many believe are bound to correct when central banks withdraw their support," Trackinsight's survey said.

"However, so far, markets have remained irrational and actively managed ETFs have met a mitigated success," the survey said.

While more investors hold actively managed ETFs today than two years ago, "they remain a minor share in their portfolio with less than 20% for more than two-thirds of our respondents," the survey said.

Still, actively managed ETFs "seem to be picking up steam with investors," the survey said. For 2022, the survey showed that 37% of respondents planned to boost by at least 5% the share of actively managed ETFs in their portfolios, up from 25% in 2020.

The survey also looked at environmental, social and governance ETFs as well cryptocurrency ETFs, two investing areas that have seen challenges this year.

"Alarmingly, our respondents declare less and less intentions to increase the share of their sustainable investments," the survey said.

The share of investors surveyed that expect their allocation to ESG ETFs to increase by more than 20% has declined each year, dropping to just 11% in 2022 from 23% in 2020, the survey said.

Cryptocurrency ETFs, while relatively new in the ETF world, have been adopted quickly by roughly half of investors surveyed. For most, however, crypto ETFs account for a small portion of their portfolios, the survey said. Two-thirds of those investing there have less than 20% of their portfolios allocated to crypto ETFs, the survey said.

For the investors participating in Trackinsight's survey, ETFs are the "vehicle of choice" when it comes to investing in cryptocurrencies, according to the survey.

"This is especially true for multi-cryptocurrency ETFs that diversify their risk across the most famous coins in a single easy trade," the survey said.