Attracted to the liquidity, ease of access and overall greater efficiency, institutions are the largest group of investors in the exchange traded fund universe.
According to Deutsche Bank, institutions represent about half of the ETF market, and we are still only in the early stages, writes Liz Tennican, managing director and head of U.S. institutional sales at BlackRock‘s iShares, for Ignites.
Futures and swaps are the biggest competitors of ETF products among institutional investors as they are highly liquid securities.
However, liquidity in ETFs is cost effective and efficient in providing institutions with transitions, cash equitization, rebalancing, liquidity overlay and tactical strategies. Without ETFs, institutions may take on positions that could come with operational or liquidity concerns. [ETF Liquidity: What You Should Know]
While short-term tactical strategies are still widespread, more institutions are utilizing ETFs in liquidity overlay strategies that mirror the risk/return profile of a target allocation – this way they can maintain cash liquidity while keeping a balanced policy portfolio.