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ETF use grows among institutional investors, says BGI report

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During the first nine months of 2008 2,717 institutional investors worldwide have reported using one or more exchange traded funds, according to a report from Barclays Global Investors.

During the first nine months of 2008 2,717 institutional investors worldwide have reported using one or more exchange traded funds, according to a report from Barclays Global Investors.

Authors Deborah Fuhr and Shane Kelly found that over the past 12 years the number of institutional users has increased 1547 per cent. This represents a CAGR of 26.29 per cent over the past 12 years.

Institutional investors in 41 countries have reported using at least one ETF through Q3 2008. The US, the UK, Canada, Spain and Switzerland have the largest number of institutional users and account for 83 per cent.

Investment advisers are the largest category of users accounting for 74 per cent of institutional users. The CAGR for this category over the past 12 years is 27.51 per cent.

Use by hedge funds has increased and currently hedge funds are the second largest category representing 14 per cent, the report found. Over the past 12 years the CAGR of hedge funds has been 36.84 per cent.

The SPDR S&P 500, iShares MSCI EAFE, iShares MSCI Emerging Markets and iShares Russell 2000 are the most widely held ETFs.

The report says that in the current market turmoil investors are becoming even more concerned about counterparty risk, transparency, liquidity and the use of derivatives and structured products. As a result, the use of ETFs to implement exposure to cash, fixed income, commodities and equity indices is becoming more popular.

‘A growing number of institutional investors embrace the use of ETFs as tools that can help them equitise cash, establish a core holding, implement tactical asset allocation, easily gain exposure to equity sectors, styles, country, regional, international and emerging market indices, government and corporate bond indices as well as commodity indices at real-time prices during the trading day,’ it says.

ETFs are often used as an alternative to futures and programme trades, it adds. ETFs have become more popular to investors who want a flexible tool that is not a derivative to allow them to quickly be able to react to short term needs or opportunities.

‘As the job of most portfolio managers has become broader and deeper, covering developed, emerging markets and frontier markets as well as looking at sectors and countries, we have found that many are admitting that they do not have the time nor resources to try to add value in all markets and are embracing the use of ETFs to gain international market exposure,’ the report adds.

‘This allows them to pick stocks in the markets that they feel can they can add value in. In other cases, these ETFs are used to equitise cash or to establish an over or underweight position. ETFs make it easier for investors to participate in all domestic asset classes, global regions and industry sectors. Most importantly, ETFs give investors the opportunity to participate where markets have been showing promise.’

The report found that growth in the use of ETFs has been partially fuelled by investors’ attempts to avoid accounting, earnings and other stock specific risk. They can be bought and sold at market, limit or as stop orders. They do not have any sales loads, although they do – like mutual funds – have annual total expense ratios, albeit less than traditional funds.

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