Latin American institutions continue to adopt ETFs at record levels according to the third annual Latin American Exchange-Traded Funds Study from Greenwich Associates, with ETF allocation now 18% of total assets in 2018. This is up from 13% in 2017 and just 8% in 2016.
The Greenwich Associates study, entitled “ETFs: Instruments of Choice for Latin American Portfolios” surveyed 50 institutional investors throughout Latin America on how they are utilizing and implementing ETFs within their portfolios. Latin American institutions are applying the funds to a growing list of applications across asset classes, resulting in ETFs becoming more mainstream components of investor’s portfolios.
Several trends are contributing to that growth:
- Risk management: Latin American institutions view risk management as their top priority for the year ahead, with approximately 70% of study respondents name “managing risk-return that is in line with objectives/outcome” as their primary 2019 objective. Latin American institutions are increasingly using ETFs to strategically and tactically position their portfolios against the looming risk of trade wars, economic recession and renewed market volatility.
- Rise of indexing: Like their counterparts in the United States, Europe and Asia, Latin American institutions continue to move assets from active management to index strategies. In fact, 88% of study participants named ETFs as their preferred wrapper for index exposures and 45% have used ETFs to replace other vehicles, primarily active mutual funds and individual stocks. This transition of portfolio assets remains one of the biggest and most consistent sources of ETF demand.
- Strategic Exposures: Latin American institutions continue to adopt ETFs for strategic purposes such as exposure to fixed-income, international diversification, and tax efficiency—with the last achieved through the use of European UCITS due to preferential withholding or estate tax rates for non-U.S. investors. 68% of respondent institutions label ETFs as strategic, with 40% of respondents reporting average ETF holding periods of longer than one year.
- Appetite for Smart Beta: ETFs have also emerged as institutions’ vehicle of choice for smart beta strategies. Sustained appetite for factor-based approaches could actually accelerate demand for ETFs in 2019. More than 60% of current investors in smart beta ETFs plan to increase allocations to the funds in the coming year. This increase is partly being driven by more sophisticated use of factor-based strategies. 57% of institutions report having developed investment views on specific factors that they want to implement in their portfolios, and can do so using ETFs.
“As these and other developments make ETFs more mainstream components of institutional portfolios, Latin American institutions are applying the funds to a growing list of applications across asset classes,” says Greenwich Associates Managing Director Andrew McCollum and author of Repositioning Portfolios, Latin American Institutions Up Their Use of ETFs. “This proliferation of uses is fueling fast expansion—especially in equity portfolios, where half of current ETF investors are planning to expand allocations in 2019, with many of these institutions anticipating increases in excess of 10%.”
“The ETF discussion is no longer about active versus passive, it is about making active investment decisions utilizing ETFs. What we are seeing today around the world and in Latin America are active investors using ETFs as efficient building blocks for their active portfolios. We are also seeing increased interest and understanding from investors about the importance of diversifying their portfolios and gaining a larger exposure to international markets.” says Nicolas Gomez, Head of iShares for Latin America.