Institutional investors could help run the next leg of growth in the exchange traded fund industry as more capitalize on the flexibility and low costs of the relatively new investment vehicle.
Large investors including pension funds and insurers are beginning to shift away from mutual funds and into ETFs, report Joe Rennison and Gavin Jackson for the Financial Times.
According to the Investment Company Institute, between 2007 and 2015, the U.S. equity mutual fund industry shrunk by $410 billion while U.S. domestic equity ETFs brought in $730 billion in net inflows.
Over the years, institutional ETF usage has surged. According to ETFGI data, in 2007, the U.S. ETF industry held $621 billion in assets under management, with institutional investors contributing $370 billion. By the end of 2014, the ETF industry grew to over $2 trillion in AUM, with $1.16 trillion from institutional investors.
Enticing larger investors to the ETF investment vehicle, the ease at which institutional investors can trade ETFs has been a boon for the industry – ETFs, like stocks, trade on the stock exchange throughout the day. Consequently, many institutional investors enjoy being able to sell ETFs at a moments notice to meet cash demand from clients to redeem their holdings.
In contrast, mutual fund redemptions can take longer to accomplish, especially for less liquid assets like bonds, which can prove difficult to liquidate during times of rising volatility.