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ETFs or exchange traded funds are already well established investment instruments in the US. They are catching on with UK investors as well as they represent a cheap and fast way to access baskets of global stocks and other investments. But what do professional investors think about them, and are there any insights for smaller investors?

Global ETF analytics platform TrackInsight recently announced the results of a survey of more than 300 professional investors in 17 countries who are active allocators to ETFs. Altogether, they look after over $277bn in ETF assets. Over half of them have 20% or more of their portfolio invested in ETF assets.

Here are five things TrackInsight found out about ETF investors:

Liquidity is a top priority

The liquidity of ETFs is the most important factor. It will be less of a concern if you are a smaller investor, but it is always worth paying attention to what your ETFs are investing in. While theoretically they can give you your money back in even the most trying circumstances, in 2008 we saw some theoretically highly liquid money market funds having trouble paying out. That said, 55% of pro investors told TrackInsight they were confident or strongly confident that ETFs could provide additional liquidity during volatile markets.

Thematic investment ETFs are worth looking at

Only a small minority of ETF investors are not in thematic ETFs. These are funds which have been designed to track an index of stocks that pursue a given industry or theme – for example, Rize ETF recently launched thematic ETFs designed to track the growth of companies active in the sustainable food and digital education markets.

ESG ETFs are going to be big

You can expect more fund managers to launch ESG ETFs into the market as demand from investors for more ethical and socially aware investment increases. Almost three quarters of professional ETF investors are either invested in or are considering buying ESG ETFs. In a way this is surprising, because many legacy ETFs were launched before ESG became a key consideration for investors. That is all changing, but at the same time it is still tough to find widely agreed ESG definitions that can be embraced by the investment industry as a whole. There is still a lack of transparency and simplicity when it comes to ESG methodologies.

Fixed income ETFs are a good substitute for bonds during market stress

Bond ETFs are still only 18% of the total ETF assets under management globally, which is surprising given the size of pension fund allocations to bond markets. But more money is starting to pour into these vehicles as investors wake up to the cheaper and more transparent nature of these funds. Bond ETFs accounted for 43% of new inflows in 2019. Also, 62% of investors find them easier to trade during times of market stress than the underlying bond markets.

Many pro investors are using active ETFs

Active ETFs are becoming a more important part of the ETF universe. According to TrackInsight numbers, 69% of respondents to their survey held active ETFs. These are a departure from the traditional passive ETF which tracks a pre-established index. We are surprised that this figure is so high, as active ETFs are new, but we expect UK investors will see them coming to exchanges in Europe in the near future.

ETFs represent a cost effective and liquid way for smaller investors to get exposure across a much broader basket of stocks. The universe of ETFs available in the UK is increasing all the time, with far more sophisticated funds now available than vanilla FTSE 100 or S&P 500 index trackers. For example, GraniteShares has launched a wide range of leveraged ETFs based on both long and short moves in leading UK and US stocks. ETFs can be traded through your broker, the same way as a share, and can also be housed in your ISA.

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Please note this article does not constitute investment advice. Investors are encouraged to do their own research beforehand or consult a professional advisor.

Graeme Andrew

Graeme Andrew

Graeme is Head of Technology at the Armchair Trader. He has worked in online financial investment publishing since 2000 as a website developer, advertising operations manager, data scientist and all-round go-to guy for online technical solutions.

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