Central banks from all over Europe have increased their allocation to ETFs over the past year, taking advantage of the wrapper’s ability to be used to take tactical positions in periods of market stress.

The Bank of Finland, the National Bank of Austria, the National Bank of Slovakia and the Bank of Latvia all said they had increased their allocation to ETFs in the past 12 months, speaking at a forum hosted by the trade publication Central Banking.

Central banks globally use ETFs, and in some cases can constitute up to 25% of a reserve portfolio, due to their operational simplicity, ease of trading, liquidity benefits, transparency and low cost.

Franz Partsch, director of the treasury department at the National Bank of Austria, said the reserve had increased exposure to equity and corporate bond ETFs as well as adding the products to its securities lending programme.

“The major advantage of ETFs in our investment strategy is flexibility for tactical positions. Additionally, ETFs in some market segments are a cost-efficient alternative to passive mandates,” he said.

Jarno Ilves, head of asset management at the Bank of Finland, added the bank had moved some of its equity investments to ESG and climate ETFs while Raivo Vanags, head of market operations department at the Bank of Latvia, said it had built up its position gradually over 2021, upping its exposure to emerging market debt and equities.

“One of the reasons for using ETFs in these markets is the operational complexity of opening separate accounts at custodians for each market if using segregated accounts or investing in-house,” Vanags told Central Banking.

“ETFs also provided the possibility of entering these markets quickly after the respective decision. Now we have exposure in these markets, we might consider other options on how to be exposed to those markets in the future.”

Despite the increased focus on ESG and sustainability, Reinhold Felber, head of reserve management at the operations department at the Central Bank of Luxembourg, said greenwashing and ESG labelling also offered a challenge from a compliance perspective.

Partsch added their exclusion criteria often went against their internal rules and risk measurement methods.

“Important disadvantages are the restriction to applying internal compliance and risk management rules, as well as high costs in some asset classes and markets,” he said.

ETFs have been gaining popularity from central banks. According to BlackRock, central banks with reserves of less than $1bn in reserves have looked to ETFs as their significantly smaller allocation limits the number of mutual funds available for them to invest in.

Conversely, others can implement a large position of more than $1bn in a single ETF trade or choose to build a position of equivalent size in smaller quantities more gradually.

In May 2020, the Federal Reserve invested approximately $8.6bn assets across 16 corporate bond ETFs as it looked to support flailing markets from the coronavirus turmoil. 

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