ETF adoption hits 'meaningful threshold' among SWFs

Nearly 40% of sovereign wealth funds have an allocation to ETFs, a new report from Invesco shows, underscoring their expanded roles among institutional investors as their rate of adoption hits a "meaningful threshold".

Invesco's Global Sovereign Asset Management Study canvassed 90 sovereign wealth funds and found flexibility, and speed and precision in implementation have driven demand for the investment vehicles.

"The wrapper is only rarely a core strategic engine; more often it is a tool that makes the rest of the portfolio easier to manage. Tactical asset allocation and liquidity management are the most cited roles, reflecting the way most funds use ETFs: to manage exposures efficiently around the edges of a more complex portfolio," the report read.

Passive equity and fixed income ETFs are "by some distance" the most popular strategies.

One participant from APAC said ETFs are mainly useful as practical tools, "help with liquidity, short-term positioning and portfolio transitions when we need to rebalance efficiently."

Thematic ETFs are also gaining ground. Several respondents described using them to gain targeted exposure to structural investment themes, including the energy transition, digital infrastructure, and technology, without the lead time required to build internal capability or appoint a specialist manager.

One APAC participant said thematic ETFs allow exposure to specific ideas "without building positions stock by stock."

Not all sovereign wealth funds treat ETFs as purely tactical, with 39% saying they use the wrapper for strategic long-term exposure.

"For most SWFs, ETFs remain an implementation tool, but a growing minority are embedding them more deeply into portfolio architecture, using them to construct strategic exposures that would previously have been built through segregated mandates or direct holdings," the report said.

Among the other key findings in the report, Invesco found 54% of sovereign wealth funds agree that resilience considerations are becoming as important as return in portfolio design.

Jonathon Crook, Invesco head of Australia and New Zealand, said resilience is an increasingly an "explicit design objective, with institutions building portfolios intended to absorb shocks and remain functional across a range of scenarios."

"The governance and operational dimensions of resilience are receiving increased attention alongside the portfolio ones, with some institutions reviewing where assets are held and on what terms they can be accessed, questions that barely registered as strategic considerations a few years ago," he said.