US institutional investors are making increasing use of exchange-traded funds (ETFs) in their portfolios, with many firms deploying them to achieve active exposures, according to a new study by research firm Greenwich Associates.
Based on interviews with 45 institutional funds – including corporate pensions, public pensions and endowments and foundations, as well as 25 large asset management firms in the US – the survey showed that nearly 50% of asset management firms and one third of institutional funds plan to increase the share of portfolio assets they invest in ETFs over the next two years.
Institutions participating in the study use ETFs for four main reasons – cash equitisation, manager transitions, rebalancing and making tactical adjustments to portfolios. Notably, 75% of asset managers use ETFs for gaining rapid exposure to an asset class, for example cash equitisation, while 63% of institutional fund respondents use ETFs during transition management.
However there is evidence that market participants are also increasingly using ETFs to support active investment strategies, with 53% of asset managers claiming to trade ETFs to gain an active exposure to international equities and 43% using them for active exposure to domestic equities.
According to Greenwich, respondents are not necessarily using actively managed ETFs, but rather passive ETFs to gain a tactical active exposure. Historically, ETFs have often been used to gain a ”passive' exposure to a non-domestic market, in which investors are content to track an index such as the French CAC40.
“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 in irregular market conditions,” said Liz Tennican, head of US iShares Institutional at asset management firm BlackRock, sponsor of the survey.
Andrew McCollum, Greenwich Associates consultant, added that the fact that no asset manager reported plans to cut ETF allocations in the coming two years also testified to the strength of demand for ETFs in the current market.
UBS added 142 European ETFs to its UBS MTF dark pool in April 2011, while Deutsche Börse added eight new State Street Global Advisors-issued ETFs to its Xetra equities trading platform in May.
BlackRock has estimated that the value of assets invested in ETFs and exchange traded products is likely to increase by 20-30% annually over the next three years, reaching US$2 trillion by early 2012, according to the firm's own study in January 2011.