(July 8, 2011) – The most recent European Institutional Asset Management Survey (EIAMS) shows that institutional investment in exchange-traded funds (ETFs) dropped significantly between 2009 and 2010, IFAOnline reported. The percentage of funds investing in ETFs dropped from 34% in 2009 to 28% in 2010. The study reports that in the last year overall fund allocations to equities fell by 2% while fixed-income investment rose to 58%, a 7% increase from last year.
The decrease in ETF investment is not a clear indicator of investor sentiment. On one hand, it would suggest that investors have a somewhat negative outlook and are moving away from equity-heavy ETFs and towards less risky fixed-income investments. More optimistically, investors may feel that they no longer need the liquidity afforded by ETFs; additionally, many investors use ETFs to hedge against risk in other areas. If either of these sentiments – outlined in an article from aiCIO’s summer issue – are true, then the turn away from ETFs provides reason for optimism for institutional investors in the post-crisis market.
Another possible driving force behind the decrease in European institutional ETF investment is the recent emergence of “synthetic” ETFs. According to BBC, in the aftermath of the crisis many European banks started offering “synthetic” ETFs that are structured around complicated derivatives. BBC reports that there is little doubt that as investors started to unearth the contents of these new ETFs, their eagerness to invest in them waned.
Regardless of the reason for the decrease in ETF investment, one fact seems clear: the big winner here is fixed-income investment. Along with the 7% increase in investment in the past year, the EIAMS also reveals that 22% of institutional investors plan on increasing their fixed-income investment while only 16% plan on decreasing such exposure. The growing interest in fixed-income investments suggests that investors are increasingly pessimistic about the speed and strength of economic recovery.
The survey also reveals that 21% of funds plan on reducing cash holdings while only 5% plan on increasing them. Investors seem more optimistic about commodities, where 15% plan on increasing investment and only 3% plan on decreasing, and other alternatives, which 34% of funds plan on increasing and just 9% plan on decreasing.
By Justin Mundt
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