The institutional adoption of equity factor ETFs

What’s driving institutional adoption of equity factor ETFs? 

Initially seen as retail products, equity factor ETFs are now widely used by institutional investors. These ETFs grew from $390 billion AUM in 2014 to $2.07 trillion in 2024¹. They can serve various roles in portfolios, from making short-term portfolio adjustments to serving as long-term allocations. MERS of Michigan’s Chief Investment Officer Jeb Burns, S&P Dow Jones Indices’ Head of Factors and Dividends Rupert Watts and Invesco’s Head of Asset Owner ETF Specialists Garrett Glawe discuss the benefits of equity factor ETFs, which group stocks with similar characteristics to generate excess returns.

Watch the full webinar to see what the panel had to say:

Our Highlights:

• Institutional investors are increasingly using ETFs for their efficiency, cost-effectiveness, liquidity, and ability to quickly implement investment views.
• ETFs are used by a wide range of asset owners, with public pensions, endowments, foundations, and healthcare organizations among the top adopters.
• The ability to lend out ETFs was noted as an additional benefit, partially offsetting the total expense ratio.
• MERS is responsible for a total portfolio of $16.5 billion, with nearly 48% of their current portfolio invested in ETFs across asset classes.
• MERS uses ETFs for beta allocations, gaining factor exposures, rebalancing, and building internal portfolios across asset classes.

Jeb Burns opened the webinar by discussing MERS’ investment portfolio and approach. They invest 70 to 75% of their total portfolio in public markets using an internal, long-term valuation model. They’ve become major adopters of ETFs because they allow the investment team to quickly express their views, adjust exposures, and build internal portfolios. Jeb shared his view that all investment decisions are active. Choosing a particular index to represent a part of the market is an active decision, as is choosing between a factor-based and broad beta approach.

Rupert Watts noted that over the past decade, factor investing has been embraced by both retail and institutional investors. Over a long period of time, many factors have exhibited better risk-adjusted returns than the broad market. Rupert explained that single factor products can serve as portfolio building blocks whereas multi-factor solutions combine factors that exhibit low correlation to each other.

Garrett Glawe noted that in the past few years, equal weight, quality, momentum, and multifactor ETFs have attracted significant interest. 2024 was a record year for Invesco’s ETF business with total global ETF AUM reaching $750 billion by the end of November 2024. This success was driven in large part by strong flows in factor-based ETFs.