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ETF usage gaining foothold among U.S. pension funds


Though pension funds have come a long way in their usage of ETFs, “it is early innings yet for ETF adoption in the pension space,” according to Adam Schenck, a Chicago-based principal and managing director at Milliman Financial Risk Management LLC, which sub-advises about $6.6 billion in ETF assets for Transamerica DeltaShares and Innovator ETFs.

“While some pensions have started to source a decent amount of their beta from passive ETFs, and a more recent trend of gaining exposure to ESG strategies through the ETF wrapper is gaining ground, the surface has barely been scratched with how much pensions can be allocating to ETFs,” Mr. Schenck said in comments emailed to Pensions & Investments.

San Francisco-based Steve Laipply, a managing director and U.S. head of iShares fixed income ETFs at BlackRock, said the money manager expects asset owner and asset manager fixed-income ETF usage to continue to grow, spurred mainly by an increasing awareness of “their ability to make portfolio construction more nimble and efficient.”

Bond ETFs can offer swift access to markets and help investors boost efficiency, reduce costs and increase liquidity, Mr. Laipply said in comments emailed to P&I.

“Additionally, longer-term asset owners are beginning to evolve their perception of bond portfolios from being just a list of bonds to a collection of risks, including betas and factors,” he said. “Ultimately, these risks may potentially be more efficiently represented through bond ETFs rather than individual bonds.”

Pension fund adoption of ETFs “is long overdue, especially when ETFs are the most efficient solution,” said Elisabeth Kashner, a Berkeley, Calif.-based vice president and director of global fund analytics at FactSet Research Systems Inc.

“It’s good to see some pensions using ETFs,” Ms. Kashner said.

Chicago-based Ben Johnson, director of global exchange-traded fund research for Morningstar Inc. cited a combination of “inertia and career risk,” when asked why pension funds don’t make greater use of ETFs.

“Inertia is a very powerful force in the asset management industry, and just investing in general,” said Mr. Johnson, adding that absent some compelling event such as staff turnover, there’s often “very little incentive to change your ways,” and the tendency for pension funds to conduct business as they always have has slowed their adoption of ETFs.

Another reason has to do with the stakeholders involved, he said.

“Oftentimes, large pensions will hire pension consultants, and pension consultants have every incentive to frankly make things more complicated than they need to be,” he said. “It’s going to be very difficult to make a living as a pension consultant just going around to your clients and recommending that they invest in a portfolio of three to five ETFs that are very broadly diversified, very low cost.”


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