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February 18, 2010

Cover Sidebar: It's All Relative

By James Ramage

Institutions have increased their usage of ETFs because they want quick and cheap exposure. More specifically, ETFs work well with some of their portfolio strategies.

In the last couple of years, active managers haven't done much better than their passive brethren, said Terry Ransford, director of trading at Northern Trust Securities Inc., the broker-dealer subsidiary of the giant asset manager. Thus, more active managers have found a place for relative return in their portfolios.

Relative-return strategies are benchmarked to an index--letting the portfolio perform relative to, say, the S&P 500. And every index ETF is, by definition, a relative-return strategy. So managers who want to acquire relative return as cheaply as possible have been looking to ETFs, because of the lower fees.

ETFs are also a natural fit for transition management, Ransford said. A foundation, endowment or pension plan that decided to terminate a manager could easily tender his assets for an ETF, because the exposure is quick and the ongoing management fee of the ETF is lower.

 

See Cover Story:

Filling the Void

 

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