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ETFs gain foothold in institutional market

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Although exchange-traded funds are most commonly thought of as a retail product, institutional investors are finding that they can be helpful tools in critical portfolio management tasks such as cash equitization, transition management, rebalancing and obtaining hard-to-achieve exposures.

ETF use among US pension funds, endowments and foundations has grown to about 14 per cent, according to the results of Greenwich Associates’ most recent annual study of the US investment management market.

Despite that relatively modest share, institutions actually represent roughly half the assets invested in ETFs in the US 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 per cent 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 survey of US pension funds, endowments, foundations, and money managers that identified themselves as ETF users.

Greenwich Associates asked the institutions participating in the survey to name the providers they use for ETFs. The results reveal two things:  iShares/BlackRock is by far the most widely used provider of ETFs among US institutions; and most institutions that employ ETFs use more than one provider. Eighty nine per cent of institutional ETF users obtain ETFs from iShares/BlackRock, whereas 60 per cent use SPDRs/ State Street and 51 per cent use Vanguard.
 
Almost 55 per cent of institutions currently employing ETFs expect their use of the product to increase in the next three years, including nearly 20 per cent that expect the amount of assets dedicated to ETFs to grow by five to ten per cent in that period. Money managers are slightly more apt to predict an increase in use: approximately 65 per cent expect to be devoting more assets to ETFs in the next 12 months, compared with half of plan sponsors. About 20 per cent of plan sponsors expect to reduce their use of ETFs.
 
Nearly 30 per cent 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.
 
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.

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