ETFs Gain A Foothold In Institutional Market
Stamford, CT USA — Although exchange traded funds (ETFs) are most commonly thought of as a retail product, institutional investors are finding that ETFs can be helpful tools in such critical portfolio management tasks as cash equitization, transition management, rebalancing, and obtaining hard-to-achieve exposures.
ETF use among U.S. pension funds, endowments and foundations has grown to about 14%, according to the results of Greenwich Associates’ most recent annual study of the U.S. investment management market. Despite that relatively modest share, institutions actually represent roughly half the assets invested in ETFs in the United States according to recent industry estimates.
Almost half the institutional users in the Greenwich Associates annual study say they employ ETFs for what they consider “tactical” tasks related to the management of their portfolios. Approximately 20% of institutional ETF users say they employ the funds to implement “strategic or long-term” investment decisions, and an equal share report that they use ETFs for both tactical and strategic purposes. “In many cases, institutions would rather use index funds or futures in implementing a specific strategy or idea, but a number of funds are discovering that ETFs can sometimes provide a more flexible and efficient solution,” says Greenwich Associates consultant Jay Bennett.
To get a clearer picture of how institutions are using ETFs, Greenwich Associates conducted a Greenwich Market Pulse to survey U.S. pension funds, endowments, foundations, and money managers that identified themselves as ETF users. Seventy institutions participated in the survey, including 43 plan sponsors and 27 money managers. Thirty-eight of the institutions individually manage more than $5 billion. The survey was conducted from March 8 to March 16, 2010.
iShares/BlackRock Biggest ETF Provider to U.S. Institutions
Greenwich Associates asked the institutions participating in the survey to name the providers they use for ETFs. The results reveal two things: 1) iShares/BlackRock is by far the most widely used provider of ETFs among U.S. institutions, and 2) Most institutions that employ ETFs use more than one provider: 89% of institutional ETF users obtain ETFs from iShares/BlackRock, whereas 60% use SPDRs/ State Street and 51% use Vanguard.
The Future of ETFs in the Institutional Marketplace
Almost 55% of institutions currently employing ETFs expect their usage of the product to increase in the next three years, including nearly 20% that expect the amount of assets dedicated to ETFs to grow by 5-10% in that period. Money managers are slightly more apt to predict an increase in use: Approximately 65% expect to be devoting more assets to ETFs in the next 12 months, compared with half of plan sponsors. About 20% of plan sponsors expect to reduce their use of ETFs.
Nearly 30% of institutions that do not use ETFs say they lack familiarity with the product. “Providers should take it up themselves to educate both investment consultants and institutions directly about the various ways ETFs can be used in managing an institutional portfolio,” says Greenwich Associates consultant Chris McNickle.
Primary Uses of ETFs Among U.S. Plan Sponsors
The survey results show that plan sponsors most commonly use ETFs for two purposes: making tactical adjustments to portfolios and gaining temporary market exposure for assets while transitioning from one external manager to another. Twenty-eight percent of plan sponsors employing ETFs use them to obtain passive investment exposures as part of core-satellite investment strategies, and almost a quarter use them for more general portfolio completion. A study participant representing a university endowment explained how his fund uses ETFs for both short-term or tactical purposes such as manager transitions and implementing investment ideas, and to gain longer-term exposures in certain asset classes. “For emerging markets, ETFs are used to gain target allocations while an active strategy and managers are implemented and hired respectively,” he said. “In the commodity/inflation hedge/real asset allocation we have exposure to gold through an ETF. It’s easier than buying bullion.”
Primary Uses of ETFs Among U.S. Investment Managers
The most common use of ETFs among money managers is cash equitization, or the process of gaining rapid exposure to an asset class. Investment managers participating in the survey say they use ETFs to gain market exposure both for incoming assets and assets waiting for distribution. Money managers that use ETFs also commonly use them in making general “tactical adjustments” to portfolios. Approximately 30% of money managers that employ ETFs use them for rebalancing and a comparable share uses them for transition management. About 20% of money managers employing ETFs use them to obtain exposures for core-satellite strategies and about one quarter report using ETFs for broad portfolio completion. One quarter of money managers are also utilizing ETFs to implement macro overlays.
Contact: Joan Weber at 1-203-625-4354 or jweber@greenwich.com for more information.
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