WallachBeth’s Feygin comments on US institutional demand for ETFs and the joys of equities that can go to the moon
A leading agency broker dealer and provider of institutional execution services in the US, WallachBeth, is well positioned to see what its institutional clients are buying in the ETF space.
Ilya Feygin (pictured), Senior Strategist at WallachBeth, explains that the client base includes pension funds, insurance funds, endowments, mutual funds and hedge funds who are actively investing or investing for the longer term.
“We help them with all sorts of things,” he says. “A number of things on the execution side, trying to achieve best execution by sourcing all sorts of liquidity whether off the floors, electronically, or through our algos to get the price and size executed, especially in ETFs which are less liquid.”
Feygin also advises clients on overall macro portfolio strategy. “We help them with product selection analysis and back testing of strategies and managing potential risks in their portfolios.”
In terms of ETF use by institutions in the US: “Adoption has exploded,” Feygin says. “There are a number of reasons for this. ETFs are very convenient products for people offering quick exposure to areas that are difficult to quickly get exposure to and also for people who quickly need index exposure and also those who want style, geographic or thematic exposure.”
Feygin reports a lot of institutional investor interest in niche areas such as some of the more sophisticated fixed income ETFs. “They have really grown way beyond just US Treasuries and the Aggregate Bond Index,” he says. “Now you can get short dated credit products, high yield, MBS and bank loans all in ETFs. All corners of the US fixed income markets are covered that allow investors to efficiently purchase and settle the product.”
Regulatory change in the US has encouraged insurance companies to use more ETFs and there is a whole new raft of products which are specifically approved and designed for insurance companies.
“There are also tactical players and strategists who offer active strategies which either rotate among different asset classes or protected strategies with downside risk protection,” Feygin says.
In terms of equity ETFs, Feygin sees investors combining long positions in equities with volatility ETFs that offset some of the losses when they decline, or options hedging through ETFs. “What’s nice is that if you do options hedging, the ETF can automatically be put or call without you doing anything,” he says.
He also sees growing use of innovative products that try to reduce the impact of potential inflation. “It’s difficult to do for people who are not set up to do that kind of thing but ETFs bring a lot of opportunities for people who are set up to things that they couldn’t do before.”
He has also seen flows into international equities, with people allocating to the broad international equity indices to get developed market exposure, and also emerging market exposure outside the US.
The successful way in which ETFs navigated the early 2020 period of intense volatility has encouraged more institutional investors to adopt their use.
“They traded down at a little bit of a discount but they were fairly liquid especially compared with everything else in early 2020 volatility,” Feygin says. “ETFs continued to see fairly large screen and block liquidity.
“We have access and relationships with many different liquidity providers,” Feygin says. “Some market makers, some buyside, some people off the floor. When it makes sense, we present orders to them and when it doesn’t make sense, we don’t, as we have many different venues for execution.
“Also, sometimes people come to us for liquidity. Sometimes market makers are put into positions they don’t want to be in and we provide anonymity, so if Goldman Sachs needs to trade with JP Morgan, they can leverage us. Large institutions don’t want to have their strategies reverse engineered. If they have a certain day or month calendar rebalance, they don’t want everyone to know that.”
With ETFs, it’s a two-sided market so people don’t know which side of the trade the client is on, Feygin says. We can get a quote on a two-sided block market, as well as access liquidity electronically or via the primary markets. Because of our size and depth and scope of relationships, we can offer clients a full spectrum of liquidity.”
The ETF desk at WallachBeth sends out a daily ETF note on new launches and Feygin comments that there is a good and wide range of ETFs available now. He predicts that crypto ETFs will be launched in the US because of demand, as evidenced by Grayscale’s Bitcoin Trust.
“It would be nice to have better bitcoin ETFs,” he says. “They provide access to another asset class and once you have liquidity, it can be more liquid than the underlying. When you get an active ETF, its popularity increases liquidity in the entire market.”
In terms of institutional use of crypto products, he notes that two thirds of the activity on the recently IPO’d Coinbase exchange is from institutional investors.
He notes that his clients like disruptive innovation ETFs, such as those offered by ARK or Direxion, particularly naming their recent Moon launch, Moonshot Innovators. “There is a minimum of 10,000 variations of growth and value and these ETFs provide exposure to disruptive innovation which people like,” he says. “These are equities than can go to the moon and that’s want people want.”