Why Institutional Investors are Using ETFs More
June 2nd 2012 at 6:00am by Tom Lydon
Exchange traded funds offer various strategies that touch upon a multitude of investment themes and styles. However, institutional investors are more interested in ETFs for their long-term benefits, instead of their quick hedging capabilities.
According to a Greenwich Associates study, institutions prefer ETFs for their “strategic” or longer-term benefits, holding the funds for one year or more, rather than as “tactical,” short-term hedging strategies in portfolio management for one to three months, reports Rosalyn Retkwa for Institutional Investor.
“What changed is that they’re using them for broader purposes,” including the use of ETFs as “liquidity vehicles,” Greenwich consultant Andrew McCollum said in the article. “What we started noticing after the financial crisis was that a lot of funds — primarily, endowments and foundations — increased their cash holdings.” [ETF Liquidity is More than Trading Volume]
But holding cash in a zero-rate environment became “a drag on portfolio returns.” ETFs, though, provide a good substitute that can be easily liquidated, and the investment vehicle have “stronger returns” than cash. [ETF Buying Patterns Highlight Safety Trade]
The study discovered that 51% of institutional investors held ETFs for a year or more in 2012, up from 36% in 2011. Additionally, the number asset managers who held onto ETFs for one year or more also increased to 33% from 18%.
“Institutions are often first drawn to ETFs for help with two basic functions: manager transitions and cash equitization/interim beta,” according to the study.
“When someone has an underperforming manager they’d like to replace, in the interim, they don’t want to leave the money with the manager, and they don’t want to lose access to that asset class; and ETFs allow them to maintain their allocations,” McCollum added.
For asset managers, 61% use ETFs during manager transitions and 78% for cash equitization/interim beta – with institutions, the percentages were 55% and 44%, respectively.
For more information on ETFs, visit our ETF 101 category.
Max Chen contributed to this article.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.