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.
When institutions want to access markets, specifically niche areas with targeted exposures, ETFs often come in as the investment vehicle of choice for difficult-to-reach asset classes.
Moreover, institutional investors may have some qualms with ETFs fees, which may appear more expensive than other index funds, like collective investment trusts. Still, the total cost of trading in ETFs may be lower when factoring in stamp taxes for international funds, securities lending and access to inefficient asset classes, such as emerging markets and small-caps.
According to a recent Greenwhich Associates study, 40% of surveyed institutions plan on increasing their ETF allocations in the next twelve months.
For more information on the ETF industry, visit our current affairs category.
Max Chen contributed to this article.