Market Measures

U.S. Exchange-Traded Fund Markets 2023: Product Development Opportunities For A Maturing Structure

Institutional ETF holdings represent just 4.2% of professionally managed channel assets

A new report from Cerulli Associates shows opportunities exist for managers to expand institutional ETF access. Access a copy of the full report here.

December 7, 2023, BOSTON—Despite collectively owning nearly $1.3 trillion in exchange-traded fund (ETF) assets, institutions (e.g., insurance general accounts, state and local defined benefit plans, endowments) make up a mere fraction (4.2%) of the segment’s $31 trillion in U.S. professionally managed assets, according to The Cerulli Report—U.S. Exchange-Traded Fund Markets 2023: Product Development Opportunities for a Maturing Structure.

ETF usage among institutions is not only limited in terms of depth, but also breadth. Just 25% of asset owners polled use equity ETFs; only 24% use fixed-income ETFs. While large segments of institutions indicate they are willing to consider equity (51%) or fixed-income (36%) ETFs, only 8% of asset owners agree they will increase use of ETFs over the next 24 months.

According to ETF issuers, asset owner preference for other vehicles is the most significant headwind to ETF adoption. Cerulli research finds that asset owners more commonly plan to increase their use of co-investments (31%), private direct investments (19%), private commingled funds (18%), and separate accounts (16%). Separate accounts have historically been a preferred way to access strategies, given their lower relative cost to operate, flexibility in customizing mandates, and ability to negotiate fees.

Measuring The Pace Of ETF Adoption

While the pace of ETF adoption amongst institutional investors remains slow, the segment still holds more than $1 trillion in ETF assets, a figure that will continue to grow...

Meanwhile, 26% report limited institutional client ETF education as a significant challenge, followed by limited client awareness of ETF issuers (22%). Issuers also cite a lengthy institutional buying process, noting the tremendous effort required to provide education and go through approval procedures.

“While the pace of ETF adoption amongst institutional investors remains slow, the segment still holds more than $1 trillion in ETF assets, a figure that will continue to grow, making it worthwhile for managers to engage and overcome longer investment processes that can involve boards and committees,” says Daniil Shapiro, director.

Cerulli encourages asset managers to continue to invest in seeking to penetrate the large institutional market with a focus on helping participants understand key ETF use cases and benefits for their channel. “As the range of options amongst active ETFs grows—and more ETFs reach the asset range to be attractive to institutional buyers (e.g., by virtue of having a larger base where the institution’s investment is a smaller slice)—an opportunity exists to expand institutional ETF access,” concludes Shapiro.

 

 

 

About Cerulli Associates
For over 30 years, Cerulli has provided global asset and wealth management firms with unmatched, actionable insights.
Headquartered in Boston, Cerulli Associates is an international research and consulting firm that provides financial institutions with guidance in strategic positioning and new business development. Our analysts blend industry knowledge, original research, and data analysis to bring perspective to current market conditions and forecasts for future developments.