Fund selectors to allocate more to ETFs despite bear market liquidity fears

Some 67% of fund selectors said liquidity issues in a major bear market were among the major risks of investing in ETFs

Some 67% of fund selectors said liquidity issues in a major bear market were among the major risks of investing in ETFs

Allocations to exchange-traded funds (ETFs) in client portfolios are set to rise over the next two to three years, despite two-thirds of fund selectors citing liquidity issues under a major bear market as the biggest risk of investing in ETFs.

The survey of 240 fund selectors across the US, EMEA, Asia Pacific and Latin America by JP Morgan Asset Management (JPMAM) found that ETFs made up 22% of client portfolios in 2016 on a global basis and is set to increase to 39% in the next two to three years.

In EMEA, respondents expect to allocate 34% of their portfolios to ETFs in the next two to three years, up from 19% in 2016 and 25% currently, while those in the US were already allocating 41% and expected this to climb to 54% in two to three years.

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Asked what they saw as the biggest threats or risks of investing in ETFs, 67% of fund selectors said liquidity issues in a major bear market, rising to 70% of respondents in EMEA.

In the Global ETF Study 2019, JPMAM said: ” Some investors may have worries that recent changes to market liquidity, such as the greater use of automated trading systems and the rise of high-frequency trading, have increased liquidity risks during periods of market stress.”

The survey also revealed that the rise of market distortion was a concern for 39% of global respondents, rising to half of US respondents, followed by taxation issues, regulation restrictions and market fragmentation.

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Bryon Lake, head of international ETFs at JPMAM, said: “Investors are becoming increasingly knowledgeable about ETFs and choosing to embrace the ETF vehicle which offers a number of unique benefits like daily liquidity, intraday trading, transparency and real time price monitoring. We believe we’re at the tipping point of the mass market adoption of ETFs.”

According to the survey, equity ETFs are likely to remain the largest allocation, rising faster than other ETF asset classes to reach 21% in two to three years’ time, compared to a 12% allocation in portfolios today.

The research identified the potential drivers behind growing demand for higher ETF allocations in client portfolios and, when asked what they regarded as the biggest advantages of investing in ETFs 83% of global fund selectors cited fees and costs, followed by trading flexibility at 65%, while 40% of respondents said transparency of holdings.

Lake added: “ETFs are typically viewed as an extension of investment toolkits to help meet evolving asset allocation needs. And this is what we’re seeing play out in our survey findings in terms of rising ETF allocations.”

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Passive ETF strategies were the most popular among the survey’s respondents globally at 63% versus 28% who favoured active ETF strategies.

The research found 59% of fund selectors used ETFs for capital growth, compared to 19% who said they used ETFs for hedging and 16% who were neutral on this question.


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