CETFA executive director explains the relationship between pensions & ETFs
In fifteen years, ETFs upended the landscape for Canadian retail investors. In 2009 Canadian ETF assets under management amounted to $31.5 billion. At the end of February 2024, Canadian ETF AUM was $409 billion. That’s a 1,198.41 per cent growth rate in just fifteen years. Just as these vehicles have grown in both popularity and sophistication, they have expanded beyond ordinary retail investors. Now institutions and even pension funds are using ETFs as part of their strategic allocations.
Pat Dunwoody, outgoing executive director of the Canadian ETF Association (CETFA), explained how institutions have historically used ETFs and how that use case has evolved over time. She outlined why many institutional managers are using ETFs for now and how the ETF industry is moving to meet that demand.
“Historically institutions were using bond ETFs because it was too expensive to buy individual bonds. They would be able to go in and buy a bond fund which would give them the exposure they wanted for a specific period of time, they could get in and get out during the times they needed,” Dunwoody says. “Then I think they realized they didn’t have toe be temporarily parking their money in ETFs, they could use them in the long-term investment side of things.”
ETFs, Dunwoody says, have become a means of outsourcing expert management. Only the largest pension funds have teams with expertise in the immense diversity of global asset classes that they could invest in. For smaller institutions and funds, ETF issuers offer geographic or market-specific expertise that can be highly valuable. An ETF allows an institution or a pension fund to access depth of knowledge without necessarily adding an undue amount of cost.
Index tracking ETFs continue to be popular for some institutions. ETFs offer the relative liquidity and ease of both entry and exit that institutions and pension funds can make use of. Dunwoody says that you can relatively easily track AUM spikes in specific ETFs when institutions move money into them for short-term periods, before pulling that money out to deploy it elsewhere.
ESG is another area where the ETF industry has helped pension funds and institutions. Many of these funds implemented ESG mandates relatively early in the rise of ESG. ETFs were and continue to be a quick way to access an ESG-compliant portfolios that would not be as costly to build and maintain for the institution.
Throughout all these periods and trends, Dunwoody notes that the easy of entry and exit from ETFs has been a popular feature for institutional fund managers. Given the time constraints and other mandates they typically deal with, ETFs often offer institutional managers a degree of utility they can’t find in other managed funds.
At the same time, the ETF industry is taking queues from institutional managers. The alternatives strategies pioneered by Canadian pension funds have been repackaged into so-called ‘liquid alternative ETFs,’ and marketed as a way to access pension-like investing. ETF issuers are now making dedicated strides to serve institutional clients. Many have hired dedicated salespeople or brought over institutional specialists from other fund management companies. The ETF industry, Dunwoody says, is staffing up and paying different compensation structures to land more institutions and pension funds.
One of the opportunities she sees coming down the line for institutions and ETF providers is to work with index makers. Dunwoody notes that massive index makers like S&P have millions of indexes with no product attached. By bringing in ETF issuers and index makers, institutional managers may be able to easily find an index and create a product that suits their specific needs.
As plan sponsors look at their pension funds’ current asset mix and overall allocations, Dunwoody says they should not be shocked to see more ETF assets in there. When they look at those ETF assets, she believes that plan sponsors need to look at what these assets are providing at what cost.
“You have to look at the price,” Dunwoody says. “If you’re buying a huge chunk for your pension plan or foundation, it’s a really inexpensive way to get those exposures. If it’s a large enough amount that the ETF issuer will work with you on adjusting certain things, too, there could be an advantage there. It comes down to the expertise to run the portfolio and the fact that these exposures make sense at a certain point in time.”
