The Markets September 19, 2018

Institutions Turn to ETFs for Bond Market Liquidity

Diminished liquidity in global bond markets is fueling demand for fixed income exchange-traded funds.

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Because global bond market liquidity has diminished, institutional investors are investing more in fixed income exchange-traded funds (ETFs), according to Greenwich Associates.

Challenges in trading, liquidity and security sourcing are particularly pronounced in Europe, where 78% of institutions say this is a problem. Sixty percent of all institutions say that over the past three years, it has become difficult to execute large bond trades. More than two-thirds of respondents to the survey say these challenges are impacting their investment management processes.

This is why 60% of institutions have increased their usage of bond ETFs, with this asset class now comprising an average of 18% of their portfolios.

“A majority of institutions around the world now consider bond ETFs as an alternative for fixed-income exposure and liquidity,” says Greenwich Associates Managing Director Andrew McCullum.

Institutions that are investing more in bond ETFs say they allow them to obtain narrow and broad fixed-income exposures in both high-level strategic functions and targeted, tactical allocations.

One-third of current ETF investors plan to increase their bond ETF allocations over the next 12 months. In this U.S., this is 30%, and in Europe, 19%.

“Based on those results and investors’ continued concerns about bond market liquidity, Greenwich Associates expects steady and, perhaps, even accelerating growth in bond ETF usage and investment among U.S. and European institutions for the next three to five years,” McCollum adds.

A previous report by Greenwich Associates suggests ETF trading practices on both the sell side and buy side are leading to suboptimal executions, limiting ETF use. In addition, Greenwich found 41% of institutional investors are using ETFs to maintain exposure to a liquid investment, and 29% are doing so to meet potential cash flow needs.

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Data & Research September 18, 2018

ICI: IRAs Are Successful Vehicles for American Savers

Saving practices tend to vary based on the investor’s age.

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The Investment Company Institute (ICI) has issued two new reports on individual retirement accounts (IRAs) that show they remain successful vehicles for retirement savers. The reports, “The IRA Investor Profile: Traditional IRA Investors’ Activity, 2007 – 2016” and “The IRA Investor Profile: Roth IRA Investors’ Activity, 2007 – 2016,” analyze data from The IRA Investor Database, which tracks more than 17 million IRA investors.

“Though there are significant differences between traditional and Roth IRA investors, both [types of accounts] provide savers with flexibility and diversification in their retirement savings options,” says Sarah Holden, ICI senior director of retirement and investor research. “Traditional IRAs are a popular option for savers who are looking to roll over a workplace retirement plan account, while Roth IRAs are often started with contributions. Both IRAs have options that appeal to workers in various stages of their lifetime savings cycle and help millions of Americans prepare for retirement.”

The reports show that Roth IRA investors tend to be younger than traditional IRA investors. At year-end 2016, 31% of the former were younger than 40, compared with 16% of the latter. Only 26% of Roth IRA investors were 60 or older, compared with 41% of traditional IRA investors.

New traditional IRAs are typically opened by rollovers, while Roth IRAs are more often started with contributions. More than 80% of new traditional IRAs in 2016 were opened exclusively with rollovers from other tax-deferred retirement savings vehicles, and more than half of traditional IRA investors with an account balance at year-end 2016 had rollovers in their account. By contrast, 70% of new Roth IRAs as of in 2016 were opened through contributions.

IRA investors who make contributions tend to maintain their contribution activity from year to year. More than 70% of traditional IRA investors who contributed in tax year 2015 also did so in 2016. The same can be said for 80% of Roth IRA investors.

Roth IRA assets are allocated more to equities and equity funds that are traditional IRAs. At year-end 2016, 65% of Roth IRA assets were invested in equities and equity funds, compared with 53% of traditional IRAs’ assets. For both types of accounts, allocation to target-date funds (TDFs) and balanced funds was similar: 19% to Roth IRAs and 18% to traditional IRAs. But it differed with respect to bonds and bond funds, with 7% of Roth IRAs having this exposure and 9% of traditional IRAs having it.

Withdrawal activity is much lower among Roth IRA investors than traditional IRA investors. In 2016, only 4% of Roth IRA investors ages 25 or older made withdrawals, compared with 24% of traditional IRA investors.

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