How one ETF issuer approaches institutional business post-rebrand

SVP behind firm’s ETF strategy explains how they're accessing the institutional market and why they’re launching 17 new products now

How one ETF issuer approaches institutional business post-rebrand

Global X Canada is working to be ‘everything to everyone’ and that includes institutions. Following their rebrand from Horizons ETFs, the firm have launched a spate of new index products offering different strategic overlays to well-known indexes like the S&P 500, the TSX 60, or the MSCI All World. Naseem Husain, Senior Vice President and ETF Strategist at Global X Canada explained that these new product launches are part of a wider push to offer Canadian investors the allocations they’re seeking in the greatest numbers. It’s a push that includes retail advisors, DIY investors, and institutions.

Husain outlined exactly how Global X is now working to bring in more institutional business. He outlined some of how institutional demand differs from traditional advisor or investor demand for ETF products and what returns profiles many institutions find attractive now. He highlighted the products that institutions tend to like more and explained some of why he sees a growing need for ETF exposure in institutional and even pension portfolios.

“Over the past few years our institutional business has been building well and we continue to invest and grow that business line,” Husain says. “Challenges we face with the smaller institutions and pension funds often revolve around a lack of operational sophistication to permit them to use ETFs outside of a pooled structure. As ETFs have done their fair share of the heavy lifting to reduce management fees in the industry, industry consultants that may prefer to partner with higher fee mutual fund operators. We would encourage pension funds to continue to invest in their operations and ask "what about ETFs" with their consultant service providers.”

Despite those challenges, a few Global X products have already begun to make an impact with institutional investors. Husain highlighted their total return indexing corporate class products, which allow investors to access an index without the income that index exposure generates. Income is incorporated into the NAV of the ETF. For many institutions who don’t want that income component, this sort of vehicle can be helpful.

He also highlighted their high interest savings ETF, which fits with the traditional institutional use case for ETFs — as a short-term, low-cost place to park money with some yield while ensuring relatively high liquidity. Other themes like US or Canadian financials ETFs, or covered call overlays, have generated some interest when compared to the cost of using these strategies in house. 

Those strategic overlays are a core part of what Global X is working to roll out now in their new product launches, which are built around those core index allocations. Namely, they’ve added ‘light leverage’ of roughly 25 per cent to some of their products. They’ve also added covered call overlays to other index products, allowing for additional income generation.

Husain says that while the product shelf is currently crowded in Canada, there is room for these variations on popular index allocations. He argues that individuals, advisors, and institutions each have unique needs for income, additional torque, or vanilla index exposure which should drive some interest.

Canada already has a disproportionate amount of major index ETFs relative to the amount of capital in Canadian ETFs. For example, the US has four S&P 500 ETFs while Canada has nine. The US ETF market has ten times the assets of Canada. Nevertheless, Husain believes that Global X can distribute enough versions of these index strategies to make a wider impact. On the institutional front he has already seen the adoption of these ETFs incorporated into their own segregated funds and other internal products.

Broadly speaking, many institutions still view ETFs as the domain of DIY investors or fee-based financial advisors. Husain argues, however, that those perceptions are now changing and that as institutional asset managers look to further their capabilities they can leverage what is a growing and increasingly sophisticated ETF marketplace.

“ETFs were actually first designed as institutional products, to help people quickly replicate products like the TSX60 and the S&P500. Thanks to the proliferation of products like asset allocation ETFs, which give diversified exposure with one click, the DIY investor has never been so well served,” Husain says. “That also rolls through to institutions. As we get smaller teams running more money doesn't make sense for you to send out a basket to trade AI stocks only to tilt to energy next month, for example… We've made it very easy for institutions to be able to get in and get out. And with the just the global scale of competitors, pricing has come down dramatically where institutional pricing and retail pricing is very, very close now. So that's what we see institutions doing. We can see holdings on sources like Bloomberg, and we watch what they're doing, what kind of ETFs that are using. Honestly, we've been surprised at how many tactical thematic ETFs they are using because it's simply easier to say I want this index exposure, or I want this these kinds of names and they're in here and I don't have to think about it.”