In the four quarters of 2008 a total of 2,926 institutional investors worldwide have reported using one or more ETFs. Over the past 11 years, the number of institutional users has increased 1,673%. This represents a CAGR of 29.9%.
Institutional investors in 42 countries have reported using at least one ETF in 2008. The United States, the United Kingdom, Canada, Spain and Switzerland have the largest number of institutional users and account for 83%.
Investment Advisors2 are the largest category of users accounting for 74% of institutional users. The CAGR for this category over the past 11 years is 31.1%.
Use by hedge funds has increased and currently hedge funds are the second largest category representing 15%. Over the past 11 years the CAGR of hedge funds has been 42.4%.
The SPDR S&P 500 (SPY US), iShares MSCI EAFE (EFA US), iShares MSCI Emerging Markets (EEM US) and iShares Russell 2000 (IWM US) are the most widely held ETFs
Deborah Fuhr, Global Head of ETF Research & Implementation Strategy at BGI said, “During the market turmoil of 2008 investors became even more concerned about counterparty risk, transparency, liquidity and the use of derivatives and structured products. As a result, the use of ETFs to implement exposure to cash, fixed income, commodities and equity indices became more popular.”
Market volatility increased significantly since Lehman Brother’s bankruptcy on 15 September 2008. During 2008, the S&P 500 Index moved by more than 5% on 18 days. There were only 17 days with moves greater than 5% in the previous 53 years according to S&P. Equity volatility as measured by the VIX index soared to record levels – nearly double the prior spikes in 2002 and 1998. The VIX started the year at 23 and ended the year at 40 with a spike of 80 and a low of 15.8.
In addition, over the five year market cycle from 2004 to 2008, S&P 500 outperformed 71.9% of actively managed large cap funds, S&P MidCap 400 outperformed 79.1% of mid cap funds and S&P SmallCap 600 outperformed 85.5% of small cap funds. These results are similar to that of the previous five year cycle from 1999 to 2003. The script was similar for non-US equity funds, with indices outperforming a majority of actively managed non-US equity funds over the past five years3.
On a global basis ETF net sales were positive US$270.4 Bn while net sales of mutual funds (excluding ETFs) were minus US$117.1 Bn during 2008 according to Strategic Insight.
The Thomson Reuters shareholding database covered 37,441 institutions reporting on holdings of US$16,474,589 Mn at the end of December 2008.
Over half of the largest institutional investors (those with assets over US$10 bn) report using one or more ETFs, while less than a quarter of institutions with assets under US$250 Mn report using ETFs. the overall penetration rate is still very low at 6.7$ of reporting institutions.
The reported ETF holdings of US$274,167 Mn at the end of December 2008 account for only 38.6$ of the total ETF AUM of US$710,902 Mn at the end of 2008.
Many institutions and retail investors are not required to report their ownership of securities through these sources which Thomson Reuters collects.
The use of ETFs by self directed and retail channels continues to grow. The United States currently has one of the highest usage rates.
The retail distribution review (RDR) in the United Kingdom is and will continue to drive the use of ETFs by financial advisors in the UK. the EU is also looking at sales practices.
Many regulators around the world are reviewing the sales practices, charges, fees and the transparency to retail clients around the world. these changes will increase the use of ETFs in the retail channels.
1The ETF Landscape Annual Review of Institutional Users of ETFs in 2008 looks at the use of ETFs by institutional investors globally who have reported holding one or more ETFs in their mutual fund holding disclosures, or in different filing sources including 13F, 13D and 13G, proxy or other declarable stakes during any of the four quarters of 2008 based on data compiled by Thomson Reuters.
2Investment advisors are institutions who manage assets for private clients and institutions.
3Standard & Poor's Indices Versus Active Funds Scorecard, Year End 2008