More Institutions Using ETFs Strategically

Institutional investors are increasingly employing exchange-traded funds for strategic purposes, including gaining long-term exposures to desired asset classes. That was the finding of a report by Greenwich Associates, which also determined that institutions are holding ETFs for longer periods than in the past.

Greenwich interviewed 80 institutional investors, including corporate pensions, public pensions, and foundations and endowments, and found that institutions are often first drawn to ETFs for help with manager transitions and interim beta.

However, once institutions integrate ETFs into their processes, they begin seeing additional applications. A full 57 percent of institutions that use ETFs now employ exchange-traded products to achieve strategic allocations, the study found.

“Many institutions consider strategic applications to include liquidity overlays or longer-term over-weights, perhaps to an asset class or a single country, especially if the security is held for more than 12 months,” said Jennifer Litwin, a senior director at Greenwich Associates.

Institutions are also tending to hold onto ETFs for longer. In 2012, about half of institutional funds using ETFs reported average holding periods of one year or more. Last year, only 36 percent of institutional funds reported average holding periods of that length.

Though institutional funds with less than $5 billion in assets under management are the most likely to hold ETFs for longer periods, 43 percent of funds above the $5 billion mark reported holding ETFs for a year or more.

About 14 percent of U.S. institutions currently use ETFs in their portfolios, according to the survey. Among current ETF users, 40 percent of institutional funds and one-third of investment managers expect to increase allocations to ETFs in the next 12 months.

“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 Greenwich Associates consultant Andrew McCollum.

One factor in the increased use of ETFs could be concerns brought on by the credit crisis. Amid the turmoil of 2008 and 2009, many institutions had to sell portfolio assets at inopportune moments in order to free up cash. In response many institutions have looked for ways to maintain more liquid holdings, and ETFs remain attractive liquid vehicles, particularly in a low interest rate environment, the report found.

Nearly 90 percent of institutional investors that employ ETFs use BlackRock’s iShares as a provider, making the company by far the most widely used ETF provider in the institutional market. State Street came in next, followed by Vanguard.