Institutional investors are increasingly turning to ETFs to facilitate a variety of essential operational, tactical and strategic fund management practices, a study released by Greenwich Associates shows.
The results reveal that once institutions integrate ETFs into their standard manager transitions or cash equitisation processes, they quickly use ETFs for additional purposes such as for liquidity management or for gaining longer-term strategic exposures.
Institutional investors are increasingly using ETFs for a range of operational, tactical and strategic portfolio management functions, shows a study by Greenwich Associates.
The trends in institutional investors’ use of ETFs are documented in year-over-year changes in the behaviours of corporate and public pension funds, foundations and endowments – all collectively referred to as ‘institutional funds’ – and asset management firms as reported by the independent research firm Greenwich Associates.
The study, in its third year and sponsored by iShares, reports that a significant number of institutional investors use ETFs for manager transitions and cash equitisation management. 78% of asset managers and 44% of institutional funds use ETFs for cash equitisation. 61% of asset managers and 55% of institutional funds use ETFs for manager transitions.
“The Greenwich Associates study confirms the wide range of ETF usage we hear from and discuss with our institutional clients,” said Daniel Gamba, Head of Americas iShares Institutional Business at BlackRock. “Institutional investors are expanding the types of ETF applications with a marked increase in liquidity management and portfolio completion.”
The recent adoption of ETFs as a tool for liquidity enhancement demonstrates how institutional investors are applying ETFs in new ways to solve problems. 31% of institutional funds and one-third of asset managers are now employing ETFs as part of an ETF overlay or sleeve to add liquidity to a portfolio and/or to reduce implementation and trading costs. That usage rate is up from just one in 10 among both groups in 2011.
“The marked increase in the use of ETFs for liquidity management is a significant development, reflecting sharper focus by institutions to assert control over their operational abilities during periods of irregular market conditions,” said Liz Tennican, Head of US Institutional Sales for iShares at BlackRock. “Liquidity has become a governance issue since the global financial crisis. Institutional investors are applying their acquired knowledge from that period to their search for effective liquidity solutions. ETFs can be an effective tool for them.”
As institutional investors look to use ETFs more strategically, they are applying them to portfolio completion. This year, 28% of asset managers and 42% of institutional investors use ETFs for portfolio completion. Last year, approximately just 20% of institutional investors used ETFs for portfolio completion.
Tennican said: “We are finding that institutional investors are expanding the types of asset classes when they utilise ETFs, for example, expanding further into international single countries and US and international fixed income.”
From a portfolio perspective, the results show that 57% of institutional ETF users are employing these products to achieve longer-term strategic allocation ranges — a share that includes 33% of asset managers and nearly 60% of institutional funds using ETFs. Those shares have both grown since last year, when, among ETF users, about 50% of institutional funds and 25% of asset managers said they used the product to achieve strategic allocation ranges.
These shifts illustrate what appears to be the natural pattern: Institutions start using ETFs to achieve specific and limited tactical goals, such as a smooth transition of assets from an outgoing manager to a replacement, but over time begin applying ETFs to more longer-term strategic ends.
Indeed, reflecting the increasingly strategic role that ETFs are playing in institutional portfolios, the average institutional holding period for ETF investments expanded meaningfully over the past year. In 2012, about 50% of institutional funds using ETFs reported average holding periods of one year or more, with 36% reporting average ETF holding periods in excess of two years – up significantly on 2011.
All in all, the results point to increasing use of ETFs among institutional investors.
The study was conducted between February and April 2012 through live, one-on-one interviews between Greenwich Associates and representative of US pensions funds, endowments, foundations and asset management companies. All participants were from organisations that include ETFs among their portfolio holdings.