Although exchange-traded funds currently account for nearly USD1trn in assets under management, institutional investors often do not take full advantage of these flexible investment tools, according to a report by State Street.
“In this time of economic uncertainty, market volatility and increased scrutiny over investment management fees, ETFs are gaining traction by enabling investors to express a tactical view on an industry, commodity or asset class while providing well-diversified, low-cost market exposure,” says Anthony Rochte, senior managing director at State Street Global Advisors.
“Institutions are increasingly discovering the benefits of ETFs. However, to fully maximise their potential, continuing dialogue with institutions and providing educational resources describing the widening array of uses for these offerings is essential.”
State Street’s Vision Focus report provides examples of current methods of employing ETFs by some institutional investors for optimal effect, including cash equitization, completion and core-satellite strategies, strategic asset allocation and tax management, among other uses. It also highlights regional differences in the development of the ETF market and provides a discussion of recent regulatory changes.
“While product innovation has been significant throughout the industry over the past two decades, the rush of new products has been a source of confusion, even for seasoned institutional investors,” says James Ross, senior managing director at State Street Global Advisors.
“With a heightened level of product development, short performance records and fluctuating regulations for some of these product offerings, selecting the best ETFs can be a challenge. ETFs with reasonable spreads, sufficient liquidity, low expenses, minimal tracking error and well-constructed underlying indices provide the best prospects for success.”