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 these funds to more strategic ends.
The results of the study show that 57% of institutional ETF users employ these products to achieve strategic allocation ranges—a share that includes one-third of asset managers and nearly 60% of institutional funds using ETFs. Those shares have grown since last year, when, among ETF users, about 50% of institutional funds and one-quarter of asset managers said they used the product to achieve strategic allocation ranges.
Institutions are often first drawn to ETFs for help with two basic functions: manager transitions and cash equitization/interim beta. Among users of ETFs, 78% of asset managers and 44% of institutional funds use the products for cash equitization/interim beta. Both of those percentages are up from 2011. Another 61% of asset managers and 55% of institutional funds in this group use ETFs in manager transitions.
This year’s Greenwich Associates study results suggest that, once institutions integrate ETFs into their manager transition or cash equitization processes, they begin seeing additional applications for the products relatively quickly. For example, in 2011, 44% of institutional fund managers that use ETFs employed them in their rebalancing processes. This year, that share rose to more than half, while last year, approximately one-in-five institutional users of exchange-traded funds used them for portfolio completion. A year later, that share increased to 28% among asset managers and to 42% among institutional funds.
Reflecting the increasingly strategic role that ETFs are taking in institutional portfolios, the average institutional holding period for ETF investments expanded over the past year. In 2012, about half of institutional funds using exchange-traded funds reported average holding periods of one year or more, with 36% reporting average ETF holding periods in excess of two years. Last year, only 36% of institutional funds reported average ETF holding periods of a year or longer.
Though funds with less than $5 billion in assets under management are most likely to hold ETFs for longer periods, 43% of the share of asset funds above the $5 billion mark also report holding ETFs for a year or more. Meanwhile, manager ETF users reporting holding periods of a year or longer increased to one-third in 2012 from just 18% in 2011, and 22% of asset managers this year report average ETF holding periods of two years or longer.The annual study was conducted by Greenwich Associates and sponsored by iShares. The results are based on interviews with 80 institutional investors, including corporate pensions, public pensions, and foundations and endowments—all collectively referred to as “institutional funds”—and large asset management firms.