Use of ETFs could increase further
From the blog: Historically, UK pensions have tended to not invest directly in exchange-traded funds. There are several reasons for this. Traditionally schemes have relied on intermediaries and tended to outsource most or even all investment functions.
As well as this, the lingering misperception that ETFs are more expensive than competing structures may lead schemes – already under increasing cost pressures – to feel ETFs aren’t for them.
Whatever the reason, they’d be well served to start considering ETFs. First, the size of the ETF market has grown exponentially over the past few years and with this comes lower costs.
Second, today there are many segments of the investment landscape – including emerging markets local currency bonds, small-cap stocks and smart beta – where few, if any, traditional passive pooled fund options are available; so for schemes seeking such assets, ETFs may be the only investable option.
Finally, regulation is increasingly an issue for schemes. Despite still being in draft, directives like Institutions for Occupational Retirement Provisions II loom on the periphery of many trustees’ minds.
The directive takes a ‘look-through’ approach to any collective investment vehicle, such as a traditional fund or an ETF.
Previously any ETF would be treated as an equity, no matter what the underlying assets were.
However, with a look-through approach, a fixed income ETF – for example – could be charged the comparatively low capital charge of the ETF’s underlying bond holdings while still benefiting from its specifics, namely trading as a single unit with daily liquidity and a closing price.
Year-on-year flows into fixed income ETFs globally have increased by 12 per cent, totalling close to $90bn (£63bn) as of end December 2015 according to Morningstar.
With IORP II on the horizon, issuance of domestic government bonds – historically a popular asset class among UK schemes – drying up, and DC trustees now legally obliged to measure the (undefined) ‘value for money’ of their scheme, the propensity to use ETFs for core, fixed income holdings is set to increase.
Alexis Marinof is EMEA head of SPDR ETFs