Institutional investors are increasingly using exchange-traded funds (ETFs) for a variety of purposes, according to research conducted by iShares, the ETF business of BlackRock.
Daniel Gamba, Head of iShares Americas Institutional Business at BlackRock.
When comparing 2013 survey data to previous years, 88% of survey respondents reported using ETFs in 2013, compared to 70% in 2010.
Institutions are utilizing ETFs primarily for index-based core allocations and tactical strategies, while also using ETFs more for other reasons such as rebalancing and risk management.
The survey of more than 1,400 iShares institutional clients, including pensions, foundations and endowments, asset managers, consultants, insurers, and registered investment advisors, also shows institutions are accessing more asset classes with ETFs such as fixed income.
When aggregating across all segments, index-based core allocations and tactical strategies are the most popular ETF applications. In addition to using ETFs for core allocations and tactical purposes, more pensions, foundations and endowments are increasingly employing ETFs for rebalancing with 30% of them using ETFs for this purpose. Asset managers are expanding their applications of ETFs by also applying them as a risk management tool with 48% of asset managers responding they use ETFs for risk management.
Daniel Gamba, Head of iShares Americas Institutional Business at BlackRock, commented, “As more and more institutions become more familiar and comfortable with ETFs, their usage typically evolves from tactical to core allocations and then expands to more uses such as risk management and portfolio rebalancing. We believe the momentum of ETFs usage will continue as institutional investors take full advantage of the product’s flexibility.”
Today ETF usage is widespread across asset classes. Over the past year, there has been growth in all categories. Domestic and international equity ETFs continued to be the most commonly utilized and domestic fixed income ETFs ranked third. Year-over-year survey results show increased use of fixed income ETFs. Between 2012 and 2013 domestic ETF usage increased from 37% to 48% and international fixed income ETFs grew from 17% to 28% of respondents.
Gamba said, “We believe the trend of using ETFs to access a wide number of asset classes will likely continue as 42% of institutional investors reported they are likely to invest in additional asset classes throughout 2013.
Liquidity and low fees are the two most common ETF benefits across all institutional segments. Institutional investors also reported transparency as a key benefit of ETFs with 42% identifying it as a key ETF benefit.
Gamba said, “Institutions across the board have found ETFs to be helpful as a liquidity overlay strategy, whereby they use ETFs that mirror their portfolio allocations with the added benefit of being able to source ETF liquidity for spending needs. The greater value placed in ETFs; transparency likely reflects the broader trend of increasing regulatory demands on institutions for more detailed disclosure.”