Demand for bond ETFs is high among asset owners, according to a Greenwich survey of 181 U.S. institutional investors conducted in the fourth quarter of 2018. The survey universe totaled 181 respondents, 37 of which were from pension funds, endowments and foundations and 33 were from insurance companies or insurance company asset management units. BlackRock Inc. sponsored the research for the report.
Survey results showed that 60% of respondents said they currently invest in bond ETFs, compared to 20% in 2017. Of respondents who currently invest, 42% intended to increase their allocations this year.
As U.S. institutions continue to shift more assets into passively managed strategies, including bonds, 78% of respondents to Greenwich's survey said ETFs are their preferred vehicle for indexed assets within their portfolios.
Among the most common uses of bond ETFs by asset owners are tactical adjustments, rebalancing, completion strategies, liquidity and transition management, cash equitization and risk management/overlay management, said Phillip R. Nelson, partner and director of asset allocation at investment consultant NEPC LLC, Boston.
"Trading physical bonds — especially high-yield and credit bonds — has become more difficult in the last 15 years" as bond market liquidity declined, making it harder for asset owners to build bond portfolios, Mr. Nelson said, noting that ETFs offer "a quick way" to get exposure.
Mr. Nelson said NEPC consultants are "agnostic about advising clients on accessing bond market beta. We urge them to find the best implementation tools for their portfolios and depending on the situation, ETFs may be the best option."
Asset owners are tapping ETFs to implement a variety of portfolio exposures.
Susan E. Oh, director of risk parity, currency hedging and strategy implementation for Pennsylvania Public School Employees' Retirement System, said ETFs "have a great role" in the fund's $4.6 billion risk-parity portfolio. "I thought it was a brilliant idea to use an ETF in the portfolio in part because of the cost savings compared to buying individual bonds," she said.
Within the $2.3 billion internally managed portion of the risk-parity portfolio, Ms. Oh uses a combination of futures, swaps, direct bond investments and ETFs.
In running the global inflation-linked bond sleeve within the fund's risk-parity allocation, Ms. Oh relies on BlackRock's TIP Bond ETF to provide exposure to U.S. inflation-protected bonds with low transaction costs. As of June 30, PennPSERS' has $236 million invested in the TIP ETF, which is also used for rebalancing within the portfolio.
Direct investment in 30-year U.S. Treasury-inflation protected bonds provides additional exposure to the U.S. bond market while exposure in the global bond portfolio to non-U.S. inflation-protected bonds is achieved through swaps, she said.
PennPSERS also uses ETFs to equitize cash within the global equity sleeve of the risk-parity portfolio and had $450 million invested in equity ETFs as of June 30.