ETF Landscape: United Kingdom Industry Review - BlackRock ...

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ETF Landscape Year End 2010United Kingdom Industry Review from BlackRockETFs gain foothold in institutional marketIn the United States, where ETFs are most commonly thought of asa retail product, institutional investors are finding that ETFs can behelpful tools for cash equitisation, transition management,rebalancing, and obtaining hard to achieve exposures.ETF use among United States pension funds, endowments andfoundations has grown to about 14%, according to the results ofGreenwich Associates’ 1 most recent annual study of the UnitedStates investment management market. Despite that relativelymodest share, institutions actually represent roughly half the assetsinvested in ETFs in the United States according to recentindustry estimates.Almost half the institutional users in the Greenwich Associatesannual study say they employ ETFs for what they consider ‘tactical’tasks related to the management of their portfolios. Approximately20% of institutional ETF users say they employ the funds toimplement ‘strategic or long-term’ investment decisions, and anequal share report that they use ETFs for both tactical andstrategic purposes.Figure 16: How ETFs are used by United States institutionsTactical adjustmentsTransitionsCash equitisationCore/satelliteRebalancingPortfolio completionETF overlayOther45%38%31%28%24%24%3%25%3%6%19%31%25%56%31%63%0% 15% 30% 45% 60% 75% 90% 105%Plan sponsorsMoney managersNote: Based on responses from 70 United States plan sponsors and money managersusing ETFs.Source: 2010 Greenwich Market Pulse – ETFs.Figure 17: ETF providers/products currently usedProviders/products %iShares/BlackRock 89%SPDRs/State Street 60%Vanguard 51%ProShares 13%BLDRs/PowerShares/INVESCO 13%Direxion 2%Rydex 2%Other 2%Note: Based on responses from 70 United States plan sponsors and money managersusing ETFs.Source: 2010 Greenwich Market Pulse – ETFs.Conclusion: the future of ETFs in theinstitutional marketplaceAlmost 55% of institutions currently employing ETFs expect theirusage of the product to increase in the next three years, includingnearly 20% that expect the amount of assets dedicated to ETFs togrow by 5–10% in that period.Money managers are slightly more apt to predict an increase in use:Approximately 65% expect to be devoting more assets to ETFs inthe next 12 months, compared with half of plan sponsors. About20% of plan sponsors expect to reduce their use of ETFs.Nearly 30% of institutions that do not use ETFs say they lackfamiliarity with the product. One way to address this lack ofinformation would be for providers to win over investmentconsultants, who would then be in a position to explain the productto their institutional clients as both a tool for tactical adjustmentsand a means of obtaining desired exposures.The results of this Greenwich Market Pulse suggest that manyinvestment consultants are not currently recommending ETFs oreven initiating discussions with their clients about the product.Source: Greenwich Associates: ETFs Gain Foothold in Institutional Market, April 2010.iShares/BlackRock is the biggest ETF provider to institutions in theUnited States. Greenwich Associates asked the institutionsparticipating in the survey to name the providers they use for ETFs.The results reveal the following: iShares/BlackRock is by far the most widely used provider of ETFsamong United States institutions. Most institutions that employ ETFs use more than one provider:89% of institutional ETF users obtain ETFs fromiShares/BlackRock, whereas 60% use SPDRs/State Street and51% use Vanguard.Institutions cite a range of criteria used in selecting an ETF provider.In addition to the obvious consideration of fees, institutions rankfour factors as particularly important in selecting an ETF provider:liquidity, benchmark, the track record of the fund, and reputation ofthe company behind the fund.Figure 18: Expected change in asset allocation to ETFsIncrease >10%Increase 5–10%Increase 1–4%No changeDecrease -1–4%Decrease -5–10%Decrease >-10%-8%-5%-3%10%18%25%33%-20% -10% 0% 10% 20% 30% 40%Note: Based on responses from 70 United States plan sponsors and money managersusing ETFs.Source: 2010 Greenwich Market Pulse – ETFs.1. Greenwich Associates surveyed United States pension funds, endowments, foundations, and money managers that identified themselves as ETF users. 70 institutionsparticipated in the survey, including 43 plan sponsors and 27 money managers. The survey was conducted from 8 March to 16 March 2010.17 This document is not an offer to buy or sell any security or to participate in any trading strategy. Please refer to important information and qualifications at the end of this material.
ETF Landscape Year End 2010United Kingdom Industry Review from BlackRockImplementing asset allocation with ETFsInvestment applicationsETFs have many investment applications. ETFs on broad-basedindices can serve as diversified core holdings, while style and sectorETFs can be used to complete parts of a portfolio or fortactical strategies.Due to their targeted exposure to specific market segments, ETFsgenerally work well within the macro asset allocationand sector emphasis models developed by equitystrategists. They also help provide efficient ways to gaininternational diversification.Another benefit of ETFs is that they are complimentary to manyother investment products. They can be used together withcommon stocks, private asset managers, and other fund products.Investors may buy ETFs to diversify their assets. Most ETFs arepassively managed portfolios designed to provide relativelylow-cost investments in broad-based or proprietary indices.Some ETFs offer relatively low-risk, broadly diversified portfolios,which many investors may find attractive as the core equitycomponents of their portfolios. Others offer diversified investmentsin particular styles, sectors, industries, regions, or countries.ETFs based on broad-market indices serve as core holdings, whichis essential, especially in today’s environment of increased marketvolatility. Since no single sector, style, or stock consistentlyoutperforms its peers, having core holdings invested in broadmarketindices not only helps reduce volatility but also can achievecompetitive returns for the overall portfolio.ETFs work well with strategic asset-allocation models. In our view,asset-allocation models have two primary applications for investors: As the framework for an entire portfolio: investors desiring acomplete asset allocation strategy may find this appealing, asthey merely have to purchase appropriate investments for eachmarket segment in their proper weightings and occasionallyrebalance their portfolios. As the core portion of a portfolio: those seeking an approachwith more active trading may find a core/satellite investmentstrategy appropriate. In this case, the model can serve as a core.In an effort to increase returns, shorter-term tactical strategies,such as stock, sector, style or country overweights may then beemployed as satellite investments. Core holdings can help ensurethat a portfolio’s performance does not deviate widely fromestablished benchmarks, while satellite investments constituteactive plays in an effort to increase returns.ETFs can be used for targeted sector exposure. Sector ETFs can be used for the tactical portion of a portfolio or to gain exposure tounderrepresented sectors in a portfolio. They can also serve as the building blocks for a sector model.Figure 19: Sector weights and YTD performanceUnited Kingdom, Europe, WorldSector#stocksMSCI UK MSCI Europe MSCI World%weight% YTDreturn#stocks%weight% YTDreturn#stocks%weightConsumer discretionary 16 5.5% 14.2% 66 8.4% 24.0% 245 10.2% 22.8%Consumer staples 10 13.5% 5.6% 38 11.5% 8.3% 123 9.3% 10.1%Energy 9 20.3% -2.9% 26 11.4% -4.8% 115 11.5% 9.5%Financials 24 21.2% -2.1% 103 22.6% -12.7% 341 20.5% 2.3%Healthcare 4 7.8% -4.8% 28 9.3% -2.4% 119 9.1% 0.4%Industrials 17 5.1% 9.1% 86 11.1% 15.9% 264 11.4% 21.3%Information technology 3 1.0% 32.3% 19 3.1% 6.7% 154 11.9% 9.5%Materials 13 14.3% 24.1% 49 10.3% 14.9% 160 8.0% 19.4%Telecommunications 4 7.3% 12.0% 22 6.6% -3.7% 51 4.1% 5.3%Utilities 6 4.0% 4.9% 29 5.5% -15.2% 89 4.0% -4.5%Total 106 100.0% 4.7% 466 100.0% 0.8% 1,661 100.0% 9.6%Note: Index returns are for illustrative purposes only and do not represent actual fund performance. Index performance returns do not reflect any management fees, transactioncosts or expenses. Indices are unmanaged and one cannot invest directly in an index. Past performance does not guarantee future results. YTD returns reflect US dollar priceperformance only from 31 December 2009 to 31 December 2010. Index weights captured from Bloomberg on 2 February 2011.Source: Global ETF Research and Implementation Strategy Team, BlackRock, Bloomberg.% YTDreturnThis document is not an offer to buy or sell any security or to participate in any trading strategy. Please refer to important information and qualifications at the end of this material. 18
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