How ETFs Meet Liquidity Needs and Support In-house Management

Our new global study, surveying 700 institutional investors and investment decision-makers, reveals how ETFs are playing a pivotal role in the evolving fixed income landscape. We highlight two key findings below.

Meeting Evolving Liquidity Demands with ETFs

In response to the pressures of the previous low interest rate environment, many institutional investors had increased allocations to non-liquid sources of income, such as private credit.

Assets under management (AUM) in private debt are forecast to reach US$2.69 trillion by 2026, overtaking real estate, according to alternatives data provider Preqin.1 This has reached a point where increasing portfolio liquidity is a top concern across all global survey participants.

Increasing Portfolio Liquidity Is a Priority Across All Survey Participants

Source: State Street Global Advisors, May 2022. Response options included: Integrate ESG considerations; manage effects of inflation/rising rates; greater portfolio liquidity; produce higher portfolio returns; generate reliable, low-risk income; diversify equity/risk exposures. Note: Respondents were allowed to select up to two options. n=700.

Investors in our survey have been largely funding their privately placed allocations from liquid sources such as public fixed income and cash over the past three years (see below).

Investors Are Predominantly Funding Private Placements from Liquid Allocations

Source: State Street Global Advisors, May 2022. Note: Respondents were allowed to select all that apply.

However, while the increase in private allocations may have improved investors’ yield and income profiles, it offers much less liquidity compared with a combination of more conventional fixed income, cash, and equities.

Investors in our survey are deploying a range of strategies to manage the increased liquidity risk associated with larger private credit exposure, including the use of fixed income ETFs.

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Endnotes

1 2022 Preqin Global Private Debt Report.

Originally Posted Q4 2022 – How ETFs Meet Liquidity Needs and Support In-house Management

Important Risk Discussion

In partnership with FT Longitude, a Financial Times company. This survey was conducted in May of 2022 via an online survey instrument (n=700) and telephone interviews (n=5). Respondents were limited to senior leaders and senior portfolio managers who are directly involved in fixed income portfolio construction and investment decisions at pension funds, wealth managers, asset managers, endowments, foundations and sovereign wealth funds.

The information provided does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor’s particular investment objectives, strategies, tax status or investment horizon. You should consult your tax and financial advisor.

All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information.

Investing involves risk including the risk of loss of principal. Investing involves risk, including the risk of loss of principal.

Diversification does not ensure a profit or guarantee against loss.

This communication is not intended to be an investment recommendation or investment advice and should not be relied upon as such.

The value of the debt securities may increase or decrease as a result of the following: market fluctuations, increases in interest rates, inability of issuers to repay principal and interest or illiquidity in the debt securities markets; the risk of low rates of return due to reinvestment of securities during periods of falling interest rates or repayment by issuers with higher coupon or interest rates; and/or the risk of low income due to falling interest rates. To the extent that interest rates rise, certain underlying obligations may be paid off substantially more slowly than originally anticipated and the value of those securities may fall sharply. This may result in a reduction in income from debt securities income.

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Disclosure: ETFs

Any discussion or mention of an ETF is not to be construed as recommendation, promotion or solicitation. All investors should review and consider associated investment risks, charges and expenses of the investment company or fund prior to investing.  Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.