US ETF Insights Synthetic Equity & Index Strategy

Deutsche Bank Markets Research

North America United States

Synthetic Equity & Index Strategy

US ETF Insights

Date 12 April 2017

The 2016 Guide to Institutional ETF Ownership

Welcome to Deutsche Bank's institutional ETF ownership landscape guide Our comprehensive fact-driven analysis of the institutional ETF ownership landscape includes over 780,000 ETF positions across all US-domiciled ETFs in the last 17 years from almost 6,000 firms from over 40 countries. Complemented with additional insights from hundreds of meetings and interactions with institutional ETF users from over 20 countries. Featuring Investment Adviser, Private Bank/WM, Broker, Mutual Fund, Hedge Fund, Pension Fund, Insurance Company, and groups of special interest such as institutions in retail distribution channels (e.g. wirehouses, RIAs, IBDs, RBDs, TAMPs, Robo-Advisors), Latin American pension funds, and international asset managers.

Sebastian Mercado, CFA

Strategist +1-212-250-8690

Institutional ETF assets grew by $213bn and reached $1.44 trillion in 2016 As of the end of 2016, almost 3,500 institutional investors held more than $1.44 trillion in ETF assets accounting for about 59% of all ETF assets. Investment Adviser remained as the dominant group with $813bn representing 33% of all ETF assets. Meanwhile, Private Bank/Wealth Management followed in a strong second place with $372bn in ETF assets or 15% of total assets.

Hedge funds recorded the strongest relative YoY growth in ETF assets Hedge funds saw an increase of 77% in ETF assets to $43.8bn, an increase from 1.2% to 1.8% in ETF ownership, and an increase of 17% in the number of funds using ETFs. Overall, they continued to prefer a reduced sample of ultra liquid ETFs. And had a very sizeable allocation to US Financials at the end of the year.

Insurance companies and mutual funds grow, brokers and pension funds lag Insurance companies and mutual funds seem to be embracing ETFs more and more and recorded healthy ETF asset growth of 43% and 38%, respectively. While brokers and pension funds saw negative (-4%), and flat (1%) growth, respectively. The decline in brokers reflects the recent capital constraints in banks, while the tepid growth in pensions answers to a rotation of users.

Asset allocation remains top institutional usage for ETFs, but not the only one Investment advisers and private banks mostly use ETFs as core asset allocation building blocks in multi asset portfolios. Hedge funds and brokers mostly use ETFs for quick access to liquidity, and risk management, and in the case of hedge funds also for tactical asset allocation. Meanwhile, mutual funds, pension funds, and insurance companies use ETFs for completion strategies, tactical satellite positions, or cash management.

Distributed on: 12/04/2017 11:57:14 GMT

Deutsche Bank Securities Inc. Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1.MCI (P) 083/04/2017.

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12 April 2017 US ETF Insights

Table Of Contents

Introduction ...................................................................... 3

Institutional ETF Ownership Review ................................. 4

Summary ........................................................................................................ 4 Top institutional users and changes ............................................................... 5 Usage preferences by institution type ............................................................ 8 Historical evolution ....................................................................................... 13 Investor demographics by ETP Issuer .......................................................... 17

Institutional ETF Investor Profiles ................................... 18

Investment Adviser ....................................................................................... 18 Private Bank/Wealth Management ............................................................... 22 Broker ........................................................................................................... 26 Mutual Fund ................................................................................................. 30 Hedge Fund .................................................................................................. 33 Pension Fund ................................................................................................ 37 Insurance Company ...................................................................................... 41

Custom Profiles .............................................................. 45

Institutions in Retail Distribution Channels .................................................. 45 Latam Pension Funds ................................................................................... 49 International Asset Managers ....................................................................... 53

Appendix A: Institutional ETF ownership definition ........ 55

Institutional investor definitions ................................................................... 55 Institutional ownership data definition ......................................................... 56

Appendix B: Other definitions ........................................ 58

ETP Universe Definitions .............................................................................. 58 Management Style or Product Strategy Definitions ..................................... 58 Product Type Definitions .............................................................................. 59

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12 April 2017 US ETF Insights

Introduction

Welcome to Deutsche Bank's 2016 institutional ETF ownership landscape guide, our comprehensive fact-driven analysis of the institutional ETF landscape. For this report we mostly focus on ETF holdings as reported by institutional investors on 13F filings, but we also include some additional sources and custom company classifications. More specifically, we processed over 780,000 ETF positions across all US-domiciled ETFs in the last 17 years from almost 6,000 firms from over 40 countries. Complemented with additional insights from hundreds of meetings and interactions we have had with institutional ETF users from over 20 countries.

Institutional investors as defined 1 in this report are basically entities that invest over $100 million in 13F securities and exercise investment discretion over those assets. The key to the definition, however, is the word investment discretion. Investment discretion means full control over the portfolio management process.

Some of the institutions using ETFs are the traditional institutions such as pension funds, hedge funds, mutual funds, insurance companies, and endowments. However, the main user base is represented by what we call the new institutions. The new institutions are entities that have been able to evolve from the retail world to the institutional world by unlocking the power of ETFs (e.g. low cost, scalability, liquidity, and access) in order to create a more leveled playing field among investors. This process of aggregating retail demand into institutionalcaliber solutions has allowed the democratization of the investment management process. Many of these new institutions can be found among investment advisers, and private banks/wealth management firms.

The main institutional users featured in this report are: Investment Adviser, Private Banking/WM, Broker, Mutual Fund, Pension Fund, Hedge Fund, and Insurance Company. And from an ETF user perspective we see investment advisers, and private banks/WM as asset allocator investors, brokers and hedge funds as liquidity seekers, and insurance companies, pension funds, and mutual funds as need-based users.

In the first section of this report we provide a full review of institutional ETF ownership across the main institutional investor groups. We discuss their usage preferences, differences among each other, and historical ownership evolution through multiple lenses.

The second section of our report provides detailed profiles for the main seven institutional investor groups featured in this report. Each profile includes a brief description of their business model, top users, historical ownership evolution, product preferences, and common utilization of ETFs.

The last section of the report provides custom profiles for groups of special interest such as institutions in retail distribution channels (e.g. wirehouses, RIAs, IBDs, etc.), Latin American pension funds, and international asset managers. These profiles use proprietary classifications, estimations, or alternative sources to help provide an additional perspective to institutional ETF usage.

1 A more detailed definition of institutional ETF ownership can be found in Appendix A.

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12 April 2017 US ETF Insights

Institutional ETF Ownership Review

Summary

As of the end of 2016, almost 3,500 institutional investors held more than $1.4 trillion in ETF assets accounting for about 59% of all ETF assets. ETF assets held by institutions grew by $213bn or 17% from one year ago, however the relative ETF ownership of institutions slipped by 1.2% relative to last year figure due to a slightly faster growth among retail investors during 2016.

Investment Adviser remained as the dominant group in terms of ETF asset ownership with $813bn representing 33% of all ETF assets. Meanwhile, Private Bank/Wealth Management followed in a strong second place with $372bn in ETF assets or 15% of total assets.

Hedge Funds recorded the strongest relative growth in assets with a 77% from a year ago. Similarly, Insurance Companies and Mutual Funds also recorded strong relative asset growth with a 43% and 38% increase from 2015, respectively. On the other hand, Pension Funds were practically flat on growth, and Brokers saw the only decline (-4%) which is consistent with an effort from Banks to free up balance sheet on the back of recent regulation regarding capital requirements.

Figure 1: Institutional ETF Ownership Summary Q4 '16

Investor Type

# of ETFs Q4 2016

ETF AUM $MM

Institutional Investor (3460)*

Invest. Adviser (2006)

1,482

Private Banking (755)

1,255

Broker (69)

1,513

Mutual Fund (163)

647

Hedge Fund (352)

764

Pension Fund (55)

174

Insurance Company (29)

418

Other (31) Inst. Investor Total

473 1,593

Retail Investor Retail Investor Total

1,661

Total ETFs

1,708

812,705 371,616

83,241 57,725 43,788 35,302 23,591 17,800 1,445,769

1,025,138 2,470,907

674,498 335,798

87,065 41,924 24,807 34,808 16,512 16,641 1,232,053

833,205 2,065,258

YoY Change $MM %

ETF Ownership %

Q4 2016

138,208 20% 35,818 11% (3,824) -4% 15,801 38% 18,981 77% 493 1% 7,080 43% 1,160 7%

213,717 17%

32.9% 15.0% 3.4% 2.3% 1.8% 1.4% 1.0% 0.7% 58.5%

191,933 23% 405,650 20%

41.5% 100.0%

Source: Deutsche Bank, Bloomberg Finance LP, FactSet. *Number of firms in parenthesis.

Figure 2: Historical ETP Institutional Ownership

Institutional ETP Ownership

90% 80% 70% 60% 50% 40% 30% 20% 10%

0%

ETF

ETV

ETN

Source: Deutsche Bank, Bloomberg Finance LP, FactSet

From a historical ownership perspective, Investment Advisers have steadily gained ETF ownership market share for most of the last 14 years. Private Bank/ WM have seen a similar trend of market share gain, but faced a small set back in 2016. Meanwhile, Brokers have been yielding market share steadily since 2007 which is consistent with our previous findings 2 that ETF assets are mostly held by investors increasingly using ETFs for asset allocation purposes. Outside these three major groups of investors, we highlight the sustained market share gains of Mutual Funds and Insurance Companies, and last year's significant rebound for

2 Sebastian Mercado. "ETFs are owned for Investing, traded for Liquidity" , US ETF Insights. Deutsche Bank Research. Aug 2016.

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12 April 2017 US ETF Insights

Hedge Funds; while Pension Funds have recently slowed down in their usage of ETFs relative to the other minor groups.

Figure 3: Historical ETF ownership evolution of main institutional investors

Institutional ETF Ownership

Institutional ETF Ownership

35%

5%

Inv. Adviser

Private Bank/WM

Broker

30%

4%

25%

20%

3%

15%

2%

10%

1% 5%

0%

0%

Mutual Fund Pension Fund Other

Source: Deutsche Bank, Bloomberg Finance LP, FactSet

Hedge Fund Insurance Company

As per historical growth trends, ETF assets held by institutions and the number of products used by them have both grown more than 7 and 8 times in the last 10 years, respectively. Similarly, the number of different institutional investors using ETFs has almost double during the same period.

Figure 4: Historical Institutional ETF Assets and number of ETFs held by institutions

Inst. ETF Assets $BN

1,600 1,400 1,200 1,000

800 600 400 200

AUM in BN # ETFs used

1,800 1,600 1,400 1,200 1,000 800 600 400 200

0

0

Figure 5: Historical number of institutional investors using ETFs

4,000

3,500 3,000 2,500 2,000 1,500 1,000

500 0

Other Insurance Co. Pension Fund Hedge Fund Mutual Fund Broker Private Bank/WM Inv. Adviser

# of ETFs used # of ETF Institutional Investors 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Source: Deutsche Bank, Bloomberg Finance LP, FactSet

Source: Deutsche Bank, Bloomberg Finance LP, FactSet

Top institutional users and changes

Top institutional ETF users by assets held mostly belong to the Investment Adviser and Private Banking groups, with some large Brokers making the top 20 also. Overall, institutional ETF assets are highly concentrated with the top 20 owners accounting for 40% of the institutional ETF assets, and the top 250 institutions accounting for about 80% of those assets.

Concentration of assets, however, can vary significantly from one investor type to another. For example, the top 20 investment advisers account for about 45% of the group assets, while the top 20 insurance companies account for almost the entirety of the institutional ETF assets in that investor segment. A different look at average ETF assets per institution within each investor type also provides a different perspective in terms of concentration. For instance, leaving Broker

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