Key Takeaways
- • BlackRock analysis, as cited by ETF Express, finds pension funds are more aware of ETF benefits than ever, with institutional interest in ETFs building.
- • According to BlackRock, a EUR1 billion allocation can typically be executed in one to two days via ETFs, versus a longer timeline when buying the underlying bonds.
- • BlackRock projects European defined contribution (DC) assets will grow from USD4 trillion in July to over USD12 trillion by 2030, driven by pension reforms in the Netherlands and Germany and general growth.
- • Industry executives at Themes ETF, HANetf and Tabula cite liquidity, diversification, cost efficiency and a shift toward thematic and active ETFs as drivers of pension adoption.
Summary
Institutional investors, including pension funds, are increasingly turning to exchange-traded funds as an investment vehicle, according to analysis compiled by BlackRock and reported by ETF Express. BlackRock's research finds pension funds are more aware of ETF benefits than ever before. The firm points to the resilience of fixed income ETFs during the onset of the Covid-19 crisis in spring 2020 and to the subsequent use of these products by the Federal Reserve in its monetary policy as evidence of their role in portfolio construction.
Liquidity is central to the case. Pension funds use ETFs as liquidity sleeves, and because many are index-based and held for long-term positions, they are viewed as a comfortable fit for pension mandates that require management of market exposure, duration and credit risk. According to BlackRock, an allocation of around EUR1 billion can typically be executed in one to two days through ETFs, whereas building the same exposure through underlying bonds could take longer. ETFs are also cited for cost efficiency, particularly in less liquid asset classes, where they can reduce trading costs.
Structural demand is expected to grow. An ageing population has expanded defined contribution pension schemes, which often start from zero and require diversified portfolios from inception. BlackRock figures attribute a forecast rise in European DC assets from USD4 trillion in July to over USD12 trillion by 2030 to pension reforms in the Netherlands and Germany alongside general asset growth.
Industry participants describe a shift in product preference. Paul Marino, chief revenue officer at Themes ETF, said ETFs offer broad access to asset classes, sectors and geographies and that lower costs and European regulation such as the Sustainable Finance Disclosure Regulation support transparent, sustainable practices that align with ETF structures; he noted growth in ESG and thematic ETFs. Tom Bailey, head of research at HANetf, said pension funds value ETF liquidity, transparency and portfolio integration, and that while broad equity and fixed income exposure remains traditional, there is growing interest in thematic and active ETFs tied to defence, emerging market internet companies and energy transition commodities such as copper. Archie Jones, investor relations associate at Tabula, said the trend is highly likely to continue, citing managers' expanding range of solutions from algorithmic to traditional active and ETFs as their most efficient vehicle for operational cost and distribution.
Liquidity is central to the case. Pension funds use ETFs as liquidity sleeves, and because many are index-based and held for long-term positions, they are viewed as a comfortable fit for pension mandates that require management of market exposure, duration and credit risk. According to BlackRock, an allocation of around EUR1 billion can typically be executed in one to two days through ETFs, whereas building the same exposure through underlying bonds could take longer. ETFs are also cited for cost efficiency, particularly in less liquid asset classes, where they can reduce trading costs.
Structural demand is expected to grow. An ageing population has expanded defined contribution pension schemes, which often start from zero and require diversified portfolios from inception. BlackRock figures attribute a forecast rise in European DC assets from USD4 trillion in July to over USD12 trillion by 2030 to pension reforms in the Netherlands and Germany alongside general asset growth.
Industry participants describe a shift in product preference. Paul Marino, chief revenue officer at Themes ETF, said ETFs offer broad access to asset classes, sectors and geographies and that lower costs and European regulation such as the Sustainable Finance Disclosure Regulation support transparent, sustainable practices that align with ETF structures; he noted growth in ESG and thematic ETFs. Tom Bailey, head of research at HANetf, said pension funds value ETF liquidity, transparency and portfolio integration, and that while broad equity and fixed income exposure remains traditional, there is growing interest in thematic and active ETFs tied to defence, emerging market internet companies and energy transition commodities such as copper. Archie Jones, investor relations associate at Tabula, said the trend is highly likely to continue, citing managers' expanding range of solutions from algorithmic to traditional active and ETFs as their most efficient vehicle for operational cost and distribution.
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