Once institutions integrate ETFs into their standard manager transitions or cash equitization processes, they quickly use the funds for additional things such as liquidity management, according to a recent study by Greenwich Associates. (See “Institutional Investors Find New Uses for ETFs.”)
Seventy-eight percent of asset managers and 44% of pensions, foundations and endowments use ETFs for cash equitization. Sixty-one percent of asset managers and 55% of institutional funds use ETFs for manager transitions.
Daniel Gamba, head of Americas iShares Institutional Business at BlackRock, said during a media briefing that the “stigma” of ETFs being a passive instrument is diminishing.
Although institutions generally use ETFs to secure passive exposures, the study found that significant numbers of institutions are using the products to obtain tactical active exposures in a variety of asset classes. More than one in five asset managers who use ETFs report employing them for active exposures in domestic equities and commodities, and about 17% said they use them for active exposures in international equities.
“This is no longer an active versus passive debate,” said Loc Vukhac, head of the iShares Asset Management and Hedge Fund Group.
Thirty-one percent of institutional funds and one-third of asset managers are now using ETFs as part of an ETF overlay to add liquidity to a portfolio and/or reduce implementation and trading costs, compared with 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 U.S. Institutional Sales for iShares.
As institutional investors use ETFs more strategically, they also apply the funds to portfolio completion. This year, 28% of asset managers and 42% of institutional investors use ETFs for portfolio completion. Last year, approximately one in five institutional investors used them that way.
The study also found that the average institutional holding period for ETF investments expanded. In 2012, about half of institutional funds using ETFs reported average holding periods of one year or more, with 36% reporting average ETF holding periods of more than two years. Last year, only 36% of institutional funds reported average ETF holding periods of a year or longer.
About 14% of U.S. institutions currently use ETFs in their portfolios, according to Greenwich’s 2011 U.S. Investment Management Study. Among current ETF users, 40% of institutional funds and one-third of investment managers expect to increase allocations to ETFs in the next 12 months, while 22% of institutional funds and 14% of asset managers plan to trim ETF allocations.
“While the share of institutions using ETFs was stable from 2011 to 2012, the results of the more recent ETF study suggest that institutional allocations to ETFs will increase to at least some extent in the coming year as investors find new ways of employing them in their portfolios,” said Andrew McCollum, Greenwich Associates consultant.